Student Loans and Chapter 13: a review of the Engen case

As a bankruptcy attorney in Mount Vernon, IL for over 20 years, I read through and analyze court rulings throughout the country, as they may be a harbinger of things to come in districts in which I practice and can be used to help Debtors get the financial relief they need.

Kansas has recently ruled on an issue very important to some debtors: Student loans and their treatment in a Chapter 13 Plan.

Read a synopsis of the case here.

Student loans are considered a non-priority unsecured debt in bankruptcy. However, the debt is non-dischargeable. This means that the debt (principle and interest) survives the bankruptcy and you will have to continue to pay the debt when your bankruptcy is completed.

Chapter 13 bankruptcy is a consolidation of all debt into one payment. Non-priority unsecured debt share a base amount that is paid over time and in proportion to the debt owed. The larger the debt, the more they will be paid from that base. For example – if your Chapter 13 Plan provides for a total sum of $10,000.00 to be paid to the general unsecured base, and your student loans are 65% of your debts, it will receive 65% of the $10,000; or $6,500.00.

When the bankruptcy is over, you will have paid $6,500.00 to your student loan. But interest continues to accrue during the 3-5 years you are in the Chapter 13. Depending on how much you owe, this may only pay some of the interest only. The principal may have remained untouched.

As the court says: “pro rata distribution of the plan funds to all unsecured creditors, and the inability to pay off the student loan debt faster than its nondischargeable interest may be incurred, could result in the debtors owing more at the end of their plan than they owed going into it. Hardly the goal of chapter 13 bankruptcy.”

However, courts in the past have rejected that argument in treating student loans differently than other non-priority unsecured debt.

The only success attorneys have had in treating student loans differently is if there is a co-debtor on the loans. In that case the co-debtor can pay the loan directly (if it was their loan) or if the debt is paid its regular monthly payment inside the plan.

The Kansas Court has found that, despite their categorization by the Bankruptcy Code and Court rulings, student loans ARE a different type of debt than other non-priority unsecured debts.

It helped to have a sympathetic debtor – the OTHER unsecured debts had been paid down 83% before the case was filed. During the life of the bankruptcy the student loans will presumably receive their “fair share” relative to what the other unsecured debts have already received pre-petition.

Quite likely that will be the factor most courts will use to distinguish this case from ones in the future. Also, it is likely the lender did not object to the Plan. Had it objected would the court have ruled differently?

But Debtors with a similar situation may finally be able to find relief from their student loan debt in a Chapter 13 filing.

About the author: As a bankruptcy attorney in Mount Vernon, IL Michael Curry of Curry Law Office has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 to speak directly with a lawyer and be on your way to Finally Be Financially Free!