Forwarding a question - Chapter 13 and student loans

[Slingerland]

Good morning! A co-worker of mine is going through an ugly divorce and will have to file for a chapter 13. I recommended this site to him, but he's having major issues getting registered (the verification email never arrives.) He asked if I would post a question from him while he tries to get registered.

Hello!

I’m going through a divorce. My wife has racked up the debt under my name and now I have to pay it off. My question is about how federal student loans are handled during a chapter 13.

I have read on some websites that student loans are lumped in just like other unsecured creditors and are paid through the plan, getting the same unsecured percentage. Then after discharge the remaining balance is still due for payment. And it is possible that the loan will be delinquent if the trustee isn’t paying the minimum due.

But I have also read that in some cases, trustees put the student loans into deferment through the 60 months and pay the other unsecured creditors. So my question is how the trustee determines to put the loans into deferment. It makes a difference to my plan.

If the student loans I’m being stuck with are put into the chapter 13 plan:

• My payback percentage will be about 60%
• I will have to turn over all tax refunds to the trustee
• Harder to save for emergencies and 401(k)

If my student loans are deferred:

• My payback percentage will be 100% (actually will pay off in under the full 60 months)
• I can keep my tax refunds
• I can apply future pay raises to savings and 401(k)
• But on the negative, the loans will still accrue interest.

I'm in my early 50s, and my ex wiped out my 401(k).

And thoughts or suggestions? I have met with a couple of attorneys, but they have a blank face look when I bring up the scenario. Thank you very much for your replies!

Vandervecken

[LadyInTheRed]

As far as I know, it is not the trustee that puts the loans into deferment, it is the lender. I suspect that whether the loan is included in the plan depends on whether the lender files a claim. If the lender puts the loan in deferment, it doesn't file a claim. But, I don't have any personal experience with this to know for sure.

Your friend would be wise to prefer the loan be paid through the plan. Besides the interest aspect, the balance gets paid down instead of having more dischargeable debt get paid down. Even if the plans is longer, he'll be better off financially in the long run.

If attorneys are really unable to discuss how his student loans might be treated, I suggest he keep looking for a good attorney. I can understand the attorneys not being able to say with certainty what will happen, but it seems they should be able to discuss possibilities. It is possible that they choose not to do so during a free consultation.

How does he know he will have to turn over tax refunds and raises in a plan that is less than 100%? My plan paid a little over 5% to creditors and I kept every raise, bonus and refund and I received at least one of each every year of my plan.

[Slingerland]

Thanks, LITR!

As far as the tax returns, etc., he's going on what the attorneys tell him. They are saying that since he has less than 100%, he'll need to be in a stair-step program (as his 401k loans drop off) and that contributing to the 401k (even if after confirmation) will get his case dismissed.

He's having some issues finding a good attorney. My attorney retired (medical issues) but my plan is pretty much on autopilot for the next couple of years, so I haven't been seeking out a new counsel yet. I'm getting a gut feeling that the attorneys are trying to force him into a plan that will get little (if any) feedback from the trustee, rather than trying to represent him and his special situation.

[Slingerland]

LITR, is it "normal" for the Federal loans to go into deferment automatically? Or does the attorney and/or trustee have to request it? Thanks again!

BTW (to anybody else interested), I subscribed to this thread but I didn't get an email saying you had replied. And my friend has never gotten the activation email. Maybe the new board software is grunged up?

[justbroke]

Slingerland If you list the "creditor" (such as Nelnet) on your petition and they are included on your mailing matrix, which they should be anyhow, they will be notified and it will automatically go into deferment. I know this from experience.

[LadyInTheRed]

BTW (to anybody else interested), I subscribed to this thread but I didn't get an email saying you had replied. And my friend has never gotten the activation email. Maybe the new board software is grunged up?

Neither of those issues is new. Has your friend posted in the "Inactive Users Post Here" thread? If he post's there to let our "super moderartor" know he is having problems, his account will be activated.

[LadyInTheRed]

Slingerland If you list the "creditor" (such as Nelnet) on your petition and they are included on your mailing matrix, which they should be anyhow, they will be notified and it will automatically go into deferment. I know this from experience.

There have been at least a couple of bkforum members who posted that their student loans did not automatically go into deferment and were paid in the plan. It seems to be most common that they go into deferral automatically, but I wouldn't count on it. Anyone who wants the loan to go into deferment should contact the lender to make sure that is their practice.

[Slingerland]

LITR and JB, thank you VERY much! I've forwarded your responses to him.

LITR, he did give me a bit more information about deferring the loans vs paying "at least something" during the payment plan. What he;s been told was that if he can defer them and pay 100% of the other creditors, the trustee will let him continue to contribute to his 401k. If not, the trustee will not let him. His employer matches 100% and the loan charges 6.9%, so he says he would get more money from the employer match than the interest would build up.

[justbroke]

LadyInTheRed and Slingerland my student loans, through Nelnet, were both in deferment and paid in the plan. However, payment was based on their "pro rata" share of the unsecured pool. That means, they were not be paid what they normally would have been entitled to had the loan not been in deferment.

While I am not and was not in a California District, I did contribute to my 401(k) while my student loan was being paid a "pro rata" share of the unsecured pool. I can't access NDC for my closed Chapter 13 (I converted to Chapter 7) to see just what was paid.