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Handling student loans in a bankruptcy

When you file a Chapter 13 bankruptcy, you create a Chapter 13 plan, which governs the repayment of most of your debts. However, a Chapter 13 plan has a few quirks, which may affect your student loan repayment. This is why it is important to speak with a bankruptcy attorney before you file, so you can determine the most appropriate option.

In a Chapter 13 plan, you first have to pay your secured creditors, such as your mortgage, because you generally have to pay 100 percent of your mortgage balance remaining. If after you have accounted for your necessary living expenses, and your secured debt, the remainder of your "disposable income" is used to pay your unsecured debt.

The problem for many borrowers in Kentucky who find it necessary to file a Chapter 13 is that they often have so little disposable income left over that they may only be paying a small percent or sometimes zero percent of their unsecured debt.

This may not be a problem for the borrower with most of their unsecured debt, such as credit card debt, as any remaining balance is discharged at the end of the bankruptcy plan period and is uncollectable by the creditor.

However, because student loans are not dischargeable in most bankruptcies, the entire balance is still due. And if you were unable to pay anything towards your student loans, with fees and interest, they may grow during the bankruptcy.

If you need to save your home from foreclosure and make up arrear payments in the bankruptcy, you may have no choice. However, it is important to discuss these questions with your bankruptcy attorney and run the calculations to determine how to best plan for resuming payment of your student loans after your bankruptcy

Source: Wall Street Journal, "How Bankruptcy Can Send Your Student Loans Soaring," Katy Stech, October 1, 2013

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