Although student loans can rarely be discharged in bankruptcy, a Chapter 11 plan may be able to restructure the repayment schedule.
Individuals often deal with a private student lender unwilling to defer or reduce payments to a level that an individual can actually maintain. Even where the borrowers propose full payment over time, a lender may demand immediate full payment, or a payment schedule that the borrowers simply cannot make.
When a bankruptcy case is filed, these creditors–like any others–are barred by the automatic stay from collecting on the debt. But after a plan is confirmed, the primary barrier to collection is the Chapter 11 plan itself.
Within the Ninth Circuit, which covers Arizona, different appellate panels have disagreed on whether a Chapter 11 plan can affect the collection schedule of debts that cannot be discharged. One thought the answer was “no,” but did not provide a final answer because the plan did not prohibit the creditor from collecting.
A later panel held that a Chapter 11 plan can indeed provide that a creditor may not collect a debt during the plan period, even if the debt cannot be discharged.
For debtors who can pay 100% of their debts, but who cannot meet their lenders’ timing demands, this can allow them to retire their debt on a schedule they can afford.
Even debtors who cannot pay 100% of their debts during the plan term may be able to retire a significant amount of their student loans, discharge the remainder of their debts, and be in a better position at the end of their plan to address the balance of their student loans.
If you are considering requesting Chapter 11 bankruptcy protection, you should consult with an attorney familiar with Chapter 11 bankruptcies to discuss your options. For a free consultation, call (480) 422-3440.