Southern District Bankruptcy Court Has A New Student Loan Workout Plan
As many people know, student loans are not dischargeable in bankruptcy, absent very severe hardship. Although Congress always seems to be working on a solution to allow loans to be discharged, these proposals never seem to go anywhere.
The good news is that locally, the Southern District of Florida has come up with its own solution, designed to get student loan companies and borrowers to sit at the negotiating table together.
Student Loan Workout Program
Because student loans are not dischargeable, they must continue to be paid usually outside the plan–but either way, the Chapter 13 bankruptcy doesn’t affect what you owe on your loans.
However, the new program now allows debtors and lenders to mediate their loans, in an effort to make it more affordable to get these loans paid off. Any debtor who files a Chapter 13 bankruptcy who has student loans is eligible to participate. The debtor must remain in the Chapter 13 plan–any negotiated deal will stop if the case is converted or the plan fails.
Even debtors who have previously enrolled in a prior repayment plan with the government can apply for the program.
The automatic stay is automatically extended to allow all parties to try to reach some compromise or resolution.
The court also provides an online portal for borrowers and lenders to exchange information.
What the Program Does and Does Not Do
The program does not discharge student loans, nor does it provide any new avenue than what is already available to modify student loans, such as income based repayment, or consolidation. However, the program will allow those programs to happen much faster and allow the borrower a more direct communication with the lender.
The program also will allow a debtor to try to tailor student loan programs so that they “fit” in a Chapter 13 repayment plan, and allow a debtor to work out their entire debt picture all at once. It may avoid the problem of a debtor getting a manageable Chapter 13 repayment plan, and then months later finding out that their student loan repayment amount makes them unable to afford everything.
Additionally, when a debtor gets an income based repayment plan after Chapter 13 approval, the debtor may need to file a motion to modify the plan–doing everything at once avoids this problem as well.
However, whatever is worked out with the student loan company is paid outside (separate from) the student loan plan payments.
The program is the same for private and federal loans except for one difference–with private student loans, the borrower can request an in person mediation conference.
The new program does not affect anything like hardship discharges, or challenges to the student loan amounts owed, which are normally filed as adversary complaints.