This post was originally published on September 3, 2009.
Chapter 13 is one of the most powerful tools for dealing with consumer debt. You can prioritize categories of debt just like in a Chapter 11. I often tell clients that debts are broken down into the following categories when filing Chapter 13 bankruptcy.
At the top is costs and administrative fees, then secured debt such as mortgages and auto loans. After that comes priority debt like taxes. Then comes special unsecured debt which must be repaid in full to effectuate completition of the plan, then finally, at the bottom of the bucket, are general unsecured debts such as mastercard, visa, discover, collections, and other bills. According to the law, student loans are considered to be in the lowest category of general unsecured debt.
In a Chapter 13, the general unsecured class rarely gets any kind of distribution from the monthly payment which is fine because at the end of the plan term, the general unsecured debts are discharged in full. This is not the case with student loans which are considered to be non-dischargeable. Congress changed the law in 1998 to make student loans non-dischargeable, which really isn’t a problem, but what Congress failed to do was to allow student loans to be classified as priority debt like they did with taxes and other certain debts owed to governmental units.
The result for bankruptcy filers who have student loans is that student loans have to go through a special analysis to determine if they can be placed in a seperate class and paid outside the normal general unsecured debt category. There are a few courts which have allowed a successul analysis of the various bankruptcy code provisions to show why the student loans should be paid outside the general unsecured class, but they are still the exception rather than the rule. With so many people having student loans as part of their debt load, the time has come for Congress to allow the law to change so that student loans are allowed priority status. This really benefits both the creditor and the debtor to have this change occur. Most bankruptcy filers want to pay their student loans back in full and giving them priority status would allow Sallie Mae to avoid the huge debt default issues that occuring with Fannie Mae and Freddie Mac. In other words, student loans are the next big debt default shoe to drop and we’re going to have to do something to deal with it. Call your Congressional Representative of Senator today and tell them you want student loans to receive priority status in bankruptcy.
Jay S. Jump is an attorney in Washington State.
Erik Clark is one of the leading bankruptcy attorneys in Southern California who has had the privilege of representing thousands of clients in chapter 7 and chapter 13 bankruptcy cases in the Los Angeles area. Erik has served as the past President of the National Consumer Bankruptcy Litigation Center (NCBLC) and the American Consumer Bankruptcy College (ACBC). His firm, Borowitz & Clark, is committed to using bankruptcy law as a tool for social justice and was one of the first consumer law firms to join the Law Firm Antiracism Alliance.