Student loans are unsecured claims but unlike other types of unsecured claims they usually cannot be discharged in bankruptcy. The treatment they receive in bankruptcy cases differs depending upon whether the debtor filed under Chapter 7 or Chapter 13 of the Bankruptcy Code.
In Chapter 7 cases student loan creditors do not collect payment from the debtor during the pendency of the bankruptcy case. They are prevented from collection activity by the automatic stay which prevents most forms of debt collection from bankruptcy debtors. After three to four months the debtor is discharged from bankruptcy after which student loan creditors are free to begin collection activity. Interest continues to accrue on these loans while collection is prevented by the automatic stay.
In Chapter 13 cases the debtor’s student loan creditors are listed in a reorganization plan. In these plans some debtors are required to pay unsecured creditors while other debtors make no payments on these types of claims. Whether or not the unsecured creditors get paid is dependent upon the debtor’s monthly disposable income. If there is disposable income available to pay unsecured creditors then the student loan creditors get paid along with the rest of the creditors listed in the reorganization plan. If there is no money to pay these creditors then the student loan creditors must wait until the debtor completes his bankruptcy case in three to five years. Once the case ends they can begin collection again unimpeded by the automatic stay.