I want to share a few practice tips and “OMG!” lessons we picked up at the NACTT Annual Conference last week in Philadelphia. I’ll break this out into four posts over the next few days: student loans, discharge issues, tax issues, and the CFPB.
STUDENT LOAN ISSUES:
OMG!: $100,000 in student loans at 8% interest will grow to almost $149,000 at the end of a 60-month chapter 13 case.
OMG!: If a federal student loan is in default (no payments for more than 270 days), there is an assessment of collection costs of up to 18.5% (and could be 25% in some instances) of the outstanding principal and interest.
Use caution when proposing to make student loan payments directly “outside” the plan:
When a debtor files chapter 13, the Department of Education puts student loans in “administrative forbearance” which is like a deferment, but interest continues to accrue.
OMG!: The Department of Education (and maybe other lenders or servicers) may refuse to accept payments from the debtor even though the plan says the debtors will make student loan payments directly. They think the payments should be coming from the trustee. Chances are the debtors don’t tell their attorneys and think they don’t have to make any student loan payments while they are in chapter 13, not realizing how much interest (and collection costs) can accrue in the meantime (all of which are nondischargeable).
Plans may need to have more specific provisions to require the student loan lenders/servicers to accept payments and apply payments per the contract. At a minimum, debtors’ attorneys need to warn their clients about these issues.
Should the trustee make conduit payments on federal student loans to protect the debtor?
The Department of Education does not permit chapter 13 debtors to participate in any income-driven repayment (IDR) plans available to non-bankruptcy borrowers, unless the chapter 13 plan contains certain specific provisions. See, for example, the “Buchanan Provisions” negotiated by North Carolina attorney Ed Boltz and the Department of Education. http://ncbankruptcyexpert.com/2015/10/02/student-loan-options-and-chapter-13-bankruptcy/