Chapter 13 Bankruptcy clients who are in the income based repayment (“IBR”) program for their student loans are at risk of having those plans cancelled by the lenders during their Chapter 13 cases.   What this means is that upon filing the Chapter 13, the lender will place the loan into a forbearance status, continuing to add 8% interest to the account during the course of the Chapter 13.

If you’re not familiar with the IBR program, the program caps Federal student loan payments at 10% of discretionary income, and results in total loan forgiveness after 20 or 25 years, depending on the Plan.   So for clients whose contractual student loan payments exceed 10% of their discretionary income, IBR makes a lot of sense.

So a cancellation of the IBR, which a student loan servicer will try to do to a Chapter 13 client, can be disastrous.

After a typical 5-year Chapter 13 bankruptcy case, although there is no collection activity during the Chapter 13, clients are in for a terrible surprise when they get a bill adding 8% interest on top of what they owed upon filing the case.    If you have $50,000 in student loan debt, just the interest could add $20,000 to the account over the course of your Chapter 13.

It is most likely in your best interest to continue in the IBR program during your Chapter 13.  This will keep you on the path toward cancelling your loans, and avoid having to restart the clock after the Chapter 13 case is over.

How to we fight the student loan servicers’ attempt to cancel your IBR?  We will insert specific language into your Chapter 13 Plan which forces the servicer to honor the IBR.  When the Plan is confirmed by the Court, the student loan company will be forced to keep you in the IBR.   We’ll also request that you be given credit for your student loan payments in your Chapter 13 Plan, and this can lower your Chapter 13 payment.

If you have questions on how your student loans will be affected by Chapter 13 Bankruptcy, please feel free to give us a call for a free consultation.