Good Reason to Delay Filing Bankruptcy until Now: The Special Timing Advantages of Dealing with Your Student Loans Under Chapter 13
It’s not easy to write off student loans, but the right timing can help. Chapter 13 gives you more power over the timing.
Our last two blog posts were about the 3-part test to qualify for an “undue hardship” discharge (write-off) of a student loan, and about how all of those 3 parts are based on timing. To discharge a student loan, you must have done certain things BEFORE asking for the discharge, you must be in a certain financial condition AT THE TIME you are asking for the discharge, and that condition must be expected to last well INTO THE FUTURE. Today’s blog shows how filing a Chapter 13 “adjustment of debts” can help meet at least some of these three parts of the “undue hardship” test.
Advantages of the Length of a Chapter 13 Case—the “Automatic Stay”
The “automatic stay” is the federal law that immediately stops virtually all collection action against you, your money, your property and your possessions at the moment your bankruptcy case is filed. This protection can last the length of your case, or until a creditor succeeds in persuading your bankruptcy court that it should be able to pursue you and your assets before the end of your case. Generally, a student loan creditor would not be able to get that permission to pursue you.
In a Chapter 7 “straight bankruptcy” case, the “automatic stay” protection lasts usually only 3 or 4 months. If a student loan creditor is aggressively collecting on the student loan before you file a Chapter 7 case, the collection of that student loan would be stopped by your filing but would start right up within just a few months. (The exception would be if you’d qualify for “undue hardship” and succeed in discharging the student loan in that Chapter 7 case.)
In contrast, a Chapter 13 case generally lasts 3 to 5 years. So its “automatic stay” protection lasts that long. That means that the aggressive collection of a student loan mentioned in the above paragraph would be stopped for the whole 3 to 5 years that your Chapter 13 case would take.
Advantages of the Length of a Chapter 13 Case—Waiting Until You Meet the 3-Part Test
Furthermore, there’s a better chance under Chapter 13 that such a student loan creditor would be stopped forever because you have more time to qualify for an “undue hardship” discharge while under the “automatic stay” protection. You’d have more opportunity to meet the first two parts of the 3-part qualifying test:
1. Since you or your dependent(s) must be experiencing an “undue hardship” at the time your attorney asks the bankruptcy court for the discharge of your student loan, Chapter 13 gives you the flexibility of waiting for up to 5 years until you meet that condition. And in the meantime, the student loan creditor is prevented from collecting on that loan.
Consider, for example, if you have a worsening chronic medical condition but one which does not currently meet the requirement that the student loan is preventing you from maintaining even a minimal standard of living. Chapter 13 would allow you to wait as long as 5 years after filing the case for your condition to worsen until you met this requirement.
2. This condition of being unable to maintain even a minimal standard of living must be predicted to last throughout all or most of the student loan repayment period. Having the flexibility to wait to file the request for an “undue hardship” discharge increases the possibility of meeting this part of the test.
Consider, for example, if you were in a serious vehicle accident just a few months before filing the Chapter 13 case, and were receiving short term disability payments. You may need bankruptcy protection from all your other creditors now, but not yet know your long-term medical prospects, specifically whether your inability to maintain even a minimal standard of living would be expected to last throughout the student loan repayment period. Filing Chapter 13 would protect you from all your creditors, including the student loan one, and keep you protected until your medical condition stabilized and your doctors could better determine your long-term prospects.
3. You must have taken certain action before requesting a student loan discharge—make a meaningful effort to repay the loan and/or apply for appropriate administrative programs for deferring or reducing payments on it. In the midst of a Chapter 13 case you would not be able to make any direct payments to the student loan creditor, nor likely be able to apply for the administrative fixes. If there isn’t great urgency to file the case, you should try to apply for the administrative payment delaying or reducing programs, in order to position yourself to meet this part of the test as well as you can before filing the Chapter 13 case.
Even If No “Undue Hardship,” At Least You Would Be Protected for 3 to 5 Years
In a Chapter 13 case, the “automatic stay” would protect you from your student loan creditor while you waited to see if your circumstances would change in such a way as to qualify you for “undue hardship” before the end of your case in 3 to 5 years. But even in those situations in which your situation improved so that you did not meet the “undue hardship” requirements, you at least would have gotten relief from your student loan creditor(s) during that period of time.