How will my student loans be treated in a chapter 13 bankruptcy?

19 July 2012

This is a good question and is of some dispute in the legal field. We start with the rule that people generally know; student loans are not dischargeable in bankruptcy (with rare exceptions). Another general rule for chapter 13 filers is that unsecured creditors are usually paid a percentage of the total amount they are owed during the chapter 13 plan. (At the end of the plan, if the debtor has done everything right, any remaining balance owed to an unsecured creditor is discharged.) And a general rule for all people filing under any bankruptcy chapter is that once the bankruptcy petition is filed, the automatic stay goes into place and most creditors have to stop collection activity. With these rules in mind, it is natural to wonder how student loans are treated during the chapter 13 plan, specifically if they get paid during the plan, and if so, how and how much?

First, understand what happens with student loans in a chapter 13 plan is a bit odd. They are kind of in their own category. As stated, the automatic stay is in place, so all direct collection activity towards the debtor stops. However, since student loans are not discharged, even though they cannot actively pursue you during the plan, the balance still accrues, including interest. In a chapter 13 plan, creditors are entitled to the debtor’s disposable income (calculated in different ways for different debtors), so almost all plans provide for a monthly payment to a trustee. (This is the most notable and apparent difference between a chapter 13 and a chapter 7.) So, yes, student loans will be paid, provided a claim is filed, some of the amount that the debtor pays to the chapter 13 trustee. The problem is that the amount paid for the student loans may not be enough to stop the total outstanding balance from increasing. Specifically, the interest could accrue faster than the percentage payment coming in reduces the balance. (This is what happens with “negative amortization.”) This possibility has led many a debtor’s attorney to try to find some way to avoid this.

Since student loans will remain after the chapter 13 plan is completed, but your other unsecured debts will be discharged, it is in the chapter 13 debtor’s interest find a way to directly pay the usual and regular amounts due towards the student loans during the chapter 13 plan. Overall, in layman terms, it would be beneficial for the debtor to treat the student loans special, like a preferred creditor, and pay them “outside” the chapter 13 plan.

Debtor’s attorneys have tried to present plans that do just this. However, paying the student loans directly during the chapter 13 plan would be to treat them better than other creditors in their class, which is not allowed because 11 U.S.C. § 1322(b)(10) does not allow a debtor to pay the student loans during the plan, unless all unsecured creditors are paid in full.

However, depending on where you live, there could be a ray of hope. Recently, a bankruptcy court in Georgia allowed direct payment towards a student loan during a chapter 13 plan. In re Freeman, Case No. 06-10651-WHD, 2006 WL 6589023 at *1 (Bankr. N.D. Ga. 2006). This decision has been criticized and is not binding on any future case. Thus, it would pay to engage a competent bankruptcy lawyer who knows how this issue is dealt with in your locality/jurisdiction if you are considering a chapter 13 bankruptcy and owe student loans.

What does the Eaton decision mean for Massachusetts homeowners facing foreclosure?

2 July 2012


On 22 June 2012 the Massachusetts Supreme Judicial Court issued its long-awaited decision in Eaton v. Federal National Mortgage Association. The issue was whether a mortgagee (bank/mortgage lender) was required to own/hold both the mortgage and note in order to foreclose, or if it was proper to foreclose with owning/holding the mortgage.

You see, when someone buys a house and gets a “mortgage” what legally happens is that they sign a: 1) promissory note; and 2) a mortgage that grants a security interest in the property to collect the promissory note. These are two separate documents. Until Eaton, the entity foreclosing only had to own/hold the mortgage in Massachusetts. This was the practice in Massachusetts and was contrary to the law in many other, if not all, other States that required the entity foreclosing to own/hold both the note and the mortgage. Eaton provided an interpretation of existing statutes that was contrary to what had been established practice in Massachusetts. Eaton is big news.

To establish what Eaton means to the consumer facing foreclosure some of the details of the decision must be discussed. Although Eaton changed the law, it is prospective only. This means that it only applies to future cases (with the exception of Ms. Eaton herself). Specifically, it only applies to foreclosures that the required notice of foreclosure had not been sent by the date of the opinion (6/22/2012). So, if that notice has been sent by this date, the foreclosure process follows the “old law” so to speak. Also, keep in mind that a bank/mortgage lender may have owned/held both the note and the mortgage anyways, so following the new interpretation/law will not be a problem. What it will affect are entities that only hold the mortgage, have not sent the required notice of foreclosure by 6/22/2012, and plan on foreclosing. Those entities will have to make a change, which will likely postpone any foreclosure sale until the same entity obtains both the note and the mortgage, at least, or something more.

The foreclosure process has a number of steps, is different in Massachusetts than other states, and the law has been dramatically changing since the onset of the Great Recession. So, if you have questions about a foreclosure you are facing, we encourage you to consult a qualified (foreclosure defense) attorney without delay to discuss your particular issue(s).