Student loan arrears can be paid ahead of all other unsecured creditors

Student loans have become an enormous predicament on not only recent college graduates, but also many American consumers who have fallen on hard times and can not manage to pay back large monthly payments for their degree.  For example, CNN recenlty posted an article demonstrating those with student loans have problems obtaining credit for anything else.   In many situations, Debtors are falling behind on student loans by months if not years, much like a mortgage.   When this happens, law suits are filed and Collection agents and collection attorneys make life just that much more difficult.  However, in Massachusetts and hopefully in other states very soon, the Bankruptcy Court has provided a method to finally resolve this debt.

After a Motion our firm filed a few months ago, Judge Feeney, of the Boston Bankruptcy Court, ruled that pursuant to Section 1322(b)(5) of Title 11,  Debtors can now cure arrears on student loan debt prior to any other unsecured obligation such as credit cards and medical bills.  Under 1322, a Debtor may elect to “provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.”  11 USC 1322(b)(5).

In the past this part of the code has been thought to apply to late home and automobile loans, but not to student loan debt.  Previously, the Courts have determined that, after concluding that 1322(b)(5) applies, in the case of student loan or other unsecured debt the Debtor must then meet an additional burden to show that the different treatment of the student loan does not unfairly discriminate against the other unsecured creditors.   The Boston Bankruptcy Court Judge took a stand and held that the analysis ends once it has been determined that the Debtor may cure under 1322(b)(5).  As a result, if a Debtor can show that they owed arrears prior to filing for bankruptcy, and that the last payment on the debt is due in more then 60 months, a Debtor may cure their defaulted payments through the plan.  The Judge did clarify, however, that her ruling related to non-dischargeable debt, and indicated that she may rule differently if it was not clear that the unsecured debt being treated differently was non-dischargeable.  What this means is that if your student loan arrears takes up all of your disposable income, then your other creditors get nothing, and the Trustee can not object by claiming the plan is not feasible.  For more information on this ruling, please contact Attorney Goldstein at the Phillips Law Offices