What is a Chapter 13 Bankruptcy? How does it work? Could it be the answer to our national student debt crisis? Possibly! We have a conference call scheduled with Senator Amy Klobuchar’s office on February 17, 2016 to discuss this very possibility. Chapter 13 could be the answer to our Student Debt Crisis forever! Help us fight to free students from the bonds of student loans for the rest of their lives.
chapter 13 bankruptcy
In general terms, a Chapter 13 Bankruptcy is a government-sponsored debt consolidation plan with a couple of important twists. First, the duration of a Chapter 13 plan is typically no less than 3 years and no more than 5 years. Second, the debtor pays whatever they can afford to pay, after paying their reasonable and necessary expenses, and whatever debt that does not get paid off, gets wiped out- forever- tax free!
For example, Lisa comes in with $50,000.00 in credit card debt and can afford to make a $200 a month Chapter 13 payment for 36 months. Lisa would pay a total of $7,200.00 over 36 months. The unpaid balance of $42,800.00 gets wiped out forever, tax free! Wow right? Kind of makes you wonder why anyone would ever consider traditional debt consolidation after you see this.
The solution to Student Loan Debt
So, what if we changed the facts just a bit- and Lisa, in addition to $50,000.00 in credit card debt also has $50,000.00 in student loan debt. After 3 years- Lisa’s earnings have risen and she can now afford 500.00 a month in a chapter 13 payment plan. Congress needs to amend the Chapter 13 Bankruptcy Code to extend the life of a chapter 13 plan by 5 years so the student loan debtor pays what they can afford to pay for an additional 5 years, receives a student loan discharge and any unpaid student loans would get wiped out- tax free!
discharged. Forever. Tax free!
So, in the above example, Lisa, pays $200.00 a month for 36 months for a total of 7200.00. The student loans would receive a pro rata share of these proceeds during the first 36 months. After 36 months, the unpaid general debt (credit cards, medical bills, etc.) gets discharged and wiped out. Debtor would remain liable on the unpaid student loan debt. However, if the debtor continues to pay what she can afford to pay, say $500.00 a month, for an additional 5 years, the remaining unpaid student loan debt at the end of five years would get discharged or wiped out, tax free! In this case, Lisa would continue to pay $500.00 a month for 5 years or a total of $30,000.00. Her unpaid Student Loan Debt of $20,000.00 would get discharged/wiped out forever! Tax free!
a benefit to the economy
If student loan debtors knew there was a light at the end of the tunnel, that they could pay their student loans based on what they could afford, commit to a minimum 8 year plan, and wipe out any remaining unpaid student loan debt, it would free them from the bonds of student loan hell for the rest of their lives. It would also have the added benefit of helping the overall economy by having younger debtors producing income spending their money on goods and services. It would also hold our colleges and universities accountable for dangling the carrot of placement and incomes that don’t come to fruition once the debtor has graduated.
With the help of students
Does this have a chance? It does if every student loan debtor calls their senator and representative insisting a solution to this problem be produced! It seems that if the promise of school is a better life, a better paying job, an investment in your future is a lie or at a minimum does not deliver on careers that produce the income necessary to pay back the student loans, not only should the student bear the brunt of that promise but so should the student loan industry and the schools themselves. After all, the schools spend enormous sums of money marketing to students- the students don’t have the same marketing funds to spend on enforcing the promise the schools put out there in the public domain. It’s a two way street and so is the solution. The students will pay but the student loan companies and the schools will take a discount.