The two types of student loans

Chapter 13 bankruptcy and student loans don’t seem to mix. But both types of loans can be controlled in Chapter 13 to avoid collections.  And a Chapter can force even government lenders to make a loan affordable.   There are two basic types of student loans, private student loans, and government student loans. Government student loans can garnish wages, seize tax refunds, levy bank accounts, and even take social security benefits without going to court.

Government loans commonly take tax refunds if you are in default, but rarely garnish wages or seize bank accounts.  You can increase your tax deductions, so nothing is lost.

Private student loans have to sue to force collections. Without a judgment, private loans cannot attach wages and bank accounts. Private student loans cannot seize your social security check or your tax refund. Neither government or private student loans can collect while you are in bankruptcy and the stay is in effect.

Chapter 13 Bankruptcy and Student Loans a simple solution

So what is the answer? Supposedly bankruptcy can never get you out of or supply a solution to a student loan problem right? Wrong. Let us look at the real record in Kentucky. Best Case bankruptcy software can look at the records of how judges have ruled in student loan cases.  About nine cases have been filed for hardship discharges in Western Kentucky in the last three years according to Best Case. Judge Fulton has denied all three adversary proceedings he was in charge of. Judges Stout and Lloyd have split between granting and denying discharges.

In four scientific studies, nationwide judges grant hardship discharges almost half the time people file and ask for the hardship discharge.  The reason why people win about 47% of the time is people who ask for undue hardship discharges make sure they have excellent cases.   If you are using an attorney, the rate is even higher.

In 2001 I was granted a partial hardship discharge by making the argument taxes took almost half the income.   Two ex-wives took the other half leaving nothing to repay student loans. Plus I was caring for an elderly father.  The only way to pay the student loans was to not provide child support.  Both the judge and the assistant attorney general were women.  The argument won a partial undue hardship of about 80% of the debt.  Undue hardship discharges are granted slightly over 40% and less than 50% of the time when it is asked for.

How Chapter 13 Bankruptcy solves private student loan problems.

What I have done with student loans for clients has been to file Chapter 13 cases which paid little or nothing. Filing Chapter 13 discourages private student loan collectors from every suing again.  After being paid nothing for five years most private loan servicers and lenders give up.  Litigation wastes legal fees and expenses.   If no payments are ever made, and no judgment is ever granted eventually the statute of limitations makes the debt uncollectible and unprofitable. They go file litigation in other cases that are more likely to end in recovery.  In some states, the statute of limitations is only 3 or 5 years, but in Kentucky, it is 15 years.

How can Chapter 13 Bankruptcy solve Government student loan problems

Government loans can normally be made affordable through IBR loans. But servicers often demand unreasonable payments so loans can be consolidated.  Servicers earn fees from penalties and interest they collect.  They want your payments and their commissions to be high.  If you need to force the servicer to offer reasonable IBR payments, you can file an adversary for a hardship discharge.  In a Chapter 13 Bankruptcy for student loans, the payments are often minimal. If the servicer is demanding unreasonably high payment terms, the issue can be placed before a judge. The judge will have to choose to allow discharging the student loan or denying basic medical care, food, and essential services to the family.  That is an element of undue hardship.

A servicer will often lower the payments for an IBR or rehabilitation if you file an adversary.   The client has to be willing to follow through with the additional expense and time to file an adversary.  I have found these strategies work.  At least one of our judges states Chapter 13 is an answer to servicers who do not offer affordable IBR and rehabilitations.


Litigating the student loan in state court against a private loan can be a ton of work and an emotional toll on the client. My solution of filing a Chapter 13 has worked so far in every private student loan Chapter 13 case I have filed.  It starves private student loan accounts to death.  Loans do not age for statute of limitations purposes while you are in bankruptcy.  But Chapter 13 does age  the amount of time private student loans have gone without payment.  Filing Chapter 13 degrades the collectability of a loan to a point where it is considered financially non-profitable to litigate it. While there is a cost to Chapter 13 it is cheaper than a garnishment.

Filing a Chapter 13 seems less stressful on the clients than litigating private student loans in state court.  A Chapter 13 student loan bankruptcy often has a minor 100 dollar a month or less payment into a Chapter 13.  You gain the benefit of the bankruptcy stay.   Chapter 13 places loans into an uncollectible status and often never sent to back legal collections again after the Chapter 13 discharges.

With government loans, Chapter 13 balloons the account unless it discharges but income based repayment is possible.  With Private loans you have the opportunity to work with lenders who have to choose to modify the loan or take nothing in payments. Therefore, call us if you are in Kentucky and you need a Chapter 13 as a solution to your student loan problem.


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