U.S. DEPARTMENT OF EDUCATION RELGULATION AFFECTING THE TREATMENT OF STUDENT LOANS IN CHAPTER 13

Prior to July 1, 2024, when a debtor filed for bankruptcy, their student loans would be placed in
admirative bankruptcy forbearance; this means that during the duration of the debtor’s chapter 13
case they would not be making any progress towards paying off their student loans and additional
interest would accrue. Thus, while the debtor was attempting to obtain a “fresh start” by filing for
bankruptcy they were also faced the consequences of not making any payments towards their
student loans during the pendency of their case.

As of July 1, 2024, a new regulation from the Department of Education will prevent
debtors enrolled in a Chapter 13 plan from being penalized by administrative bankruptcy
forbearance. Under the new regulation (34 C.F.R. §685.209(k)(4)(iv)(K)), those who are enrolled
in an income driven repayment plan can receive a monthly credit towards forgiveness of their
student loans while the loans are under administrative bankruptcy forbearance, if, the borrower is
making payments under their confirmed bankruptcy plan. The debtor will receive credit towards
the forgiveness of their student loans when the department is notified that the buyer has made
payments under their confirmed bankruptcy plan. When the trustee has distributed the debtor’s
payments, the department will be notified. Therefore, this new regulation allows debtors to make
progress towards loan forgiveness while their Chapter 13 case is pending.

How This New Regulation Works:

The life of a student loan is 25-years when a debtor is enrolled in an income driven repayment plan
(IDR). In other words, a debtor needs 300 “credits” towards forgiveness when enrolled in an IDR plan
to receive forgiveness. Under the new regulation, IDR plan debtors will receive credits towards student
loan forgiveness while their loan is in administrative bankruptcy forbearance, and they are making
payments under their chapter 13 plan.

Hypothetical:

A debtor enrolled in an IDR plan, subsequently filed for chapter 13, and had their student loan placed
in administrative bankruptcy forbearance. Their case was pending for 2-years, and the debtor made
payments under their confirmed bankruptcy plan. At the close of the debtor’s chapter 13 case, the debtor
will receive 24 credits out of the 300 credits they need to receive forgiveness.

A recent injunction, issued in the Eighth Circuit, against the U.S. Department of Education has
prevented the department from implementing parts of the “Save on Valuable Education Plan”
(SAVE) and other IDR plans. This injunction may impact debtors’ ability to receive credit
towards student loan forgiveness during chapter 13. Alternatively, a debtor may continue to make
payments under their income driven repayment plan rather than having the loans placed in
administrative forbearance, especially when their monthly payments under such plan are $0 per
month. Generally, a debtor is permitted to separately classify student loans and continue making
payments towards their income driven repayment plan, as long as making such payments would
not unfairly discriminate against other classes of unsecured debtors, as stated under 11 U.S.C.
§1322(b)(1).