Student loans are a peculiar sort of debt in the context of a Chapter 13 bankruptcy case. They are unsecured which entitles them to low priority for repayment in Chapter 13 plans, yet they are nondischargable, meaning the student loan debt survives the bankruptcy discharge. Because of these two traits, it is very important to pay special attention to student loan debt in Chapter 13 plans.
To understand why, we need to consider how unsecured claims are paid in Chapter 13 plans. In Chapter 13 bankruptcy cases, unsecured creditors aren’t always entitled to receive payment. If and how much an unsecured creditor will be paid depends on the disposable income available to the debtors. Unsecured creditors do not automatically receive payment in Chapter 13 bankruptcy. Rule 3002 of the Federal Rules of Bankruptcy Procedure states that in order to receive payment, creditors have to file a proof of claim, which basically is documentation proving what they are owed and why. If the creditor doesn’t file a proof of claim, they don’t get paid.
In my experience, student loan creditors are especially lazy about filing proof of their claim. Their claims are nondischargeable, so even if they don’t file a proof of claim they will get paid eventually. However, whether or not a student loan creditor files a proof of claim can be very significant to a debtor. Let me give you an example. John owes $100,000 in unsecured debt. $40,000 of that debt is student loan debt. Based upon his disposable income, he potentially will have to pay back $60,000 (60% of the total) to his unsecured creditors in his Chapter 13 plan, depending on how many of them file proof of claim. If all of his creditors file proof of claims, he will pay back 60% of his total unsecured debt. The student loans will be paid back 60% ($24,000) of their claim in the plan, and the remaining creditors will be paid back 60% ($36,000) of their claims, for a total of $60,000. After his bankruptcy he will still owe $16,000 of student loan debt (the amount of student loan debt not paid in the bankruptcy) because this debt is nondischargable, but the remaining $24,000 of other unsecured claims will be discharged, meaning John will not have to pay back those debts. John’s total payments to his creditors will be $60,000 in the bankruptcy case and $16,000 afterwards, for a total of $76,000.
But look what happens if the student loan creditors don’t file a proof of claim. The student loan creditors will receive nothing, but the other unsecured creditors are paid in full, meaning that John will have paid $60,000 in the bankruptcy case to his unsecured creditors, and still owe $40,000 to the student loan creditor after bankruptcy, for a total of $100,000. So, how can we make student loan creditors file a proof of claim? We can’t. But Rule 3004 of the Federal Rules of Bankruptcy Procedure allows debtors to file a proof of claim on behalf of creditors when they fail to do so. So as you can see, attorneys should pay special attention to student loan debt in Chapter 13 plans.