Chapter 13 has been popular to strip down junior liens such as 2nd trust deeds and home equity loans. But it can also be used to handle student loans and taxes which are not yet dischargeable. Why should you use Chapter 13 to handle student loans and taxes: To save on interest and to shorten the pay off period. In Chapter 13, the creditor cannot charge interest or penalties. It doesn’t matter if the creditor is the government.
Let’s take a typical example of registered nurses. Once you become an RN, you have at least $60,000 of student loans. Nurses easily find jobs and normally work two or three jobs. I have seen many cases where the client nurse can gross upwards of $200,000 a year with several jobs. The income is there to be made but you have to literally work your butt off. So, let’s look at an actual client. She has two jobs, nets about $100,000 a year, has a mortgage, a home equity loan, two nice cars and 3 minor children going to private school. Husband makes half her income. Combined net income is $130,000 annually. It’s good income but there are a lot of expenses. Added to these, she has $60,000 of student loans on which she pays a monthly of $1,000 and for the next 30 years.
If client pays $1,000 a month for 360 months, she would have paid $360,000 for a loan of $60,000. The interest she would have paid in 30 years is $300,000. Of course, these are general estimates, but they are not too far off. If the loan is for 20 years, then she would have paid $240,000, of which $180,000 is interest. You get the picture. The longer she pays, the higher the cost of the loan. Even at 10 years, she would have paid $120,000 for a $60,000 loan.
But on a Chapter 13, she would pay the $60,000 at the rate of $1,000 a month over 60 months, or 5 years. If she completes the 60 payments of $1,000 a month, at the end of the Chapter 13, how much student loan will she owe, ZERO. She will not owe any student loans anymore! Why is this so? Because in Chapter 13, she is able to pay off the entire principal over 5 years, and during these 5 years, creditor cannot charge interest or penalties. Chapter 13 allows client to pay 100% of principal, and no interest or penalties during the repayment period. Therefore, client is able to pay off the entire principal in 5 years! If the entire principal is paid off in 5 years, there is no principal left that will acquire interest after the completion of the plan.
So, let’s just say client is 30 years old now. At the age of 35, how much student loan will she owe if she completes her Chapter 13 plan payments, ZERO. If she does not do a Chapter 13 now to handle her student loan, how much student loan will she owe at the age of 35? Close to $304,000 of principal and future interest if the loan is 30 years. Close to $180,000 of principal and future interest if the loan is 20 years.
What happens to her credit score if she files for Chapter 13? While on the 13, if she is making her house and car payments on time, her score will be about 640. Can she refinance her house for lower interest while on a 13? She sure can because my other clients, spouses both nurses, started their 13 three months ago, and a creditor just offered to refinance their house at a lower interest fixed for 30 years. Of course, there could be some difference between my clients and your case, but I am telling you this is fact, and the court just granted our motion to refinance residence on April 28!
The same is true for taxes. If you owe say, $30,000 that is not yet dischargeable, you can pay the IRS at $500 a month, without any interest or penalties. If you make a payment plan with the IRS, you pay interest and penalties while there is a balance outstanding!