Making Voluntary Payments to Student Loans During Chapter 7 Bankruptcy

Voluntary Payment of Student Loan During Chapter 7 Bankruptcy to Avoid InterestFrom time to time, I receive a form letter from a student loan servicing company concerning one of my Chapter 7 bankruptcy clients that goes something like this:

“We have received notice that your client has filed for Chapter 7 bankruptcy protection. In response, we have applied a forbearance to the student loan listed below. Automatic debit payments have been suspended. While the forbearance is in effect, interest will continue to accrue on this account. When we receive notice that your client’s bankruptcy case has closed, such interest will be capitalized, increasing the principal balance of the loan. If your client would like to make voluntary payments while the bankruptcy case is remains open, and thus avoid additional interest, your client may do so by sending payments to [address of student loan lender].”

Sometimes a similar letter is mailed directly to my bankruptcy client as well. So, why do student loan servicing companies, including FedLoan Servicing (the student loan servicing arm of the US Dept. of Education) stop making automatic debits from your account when you file Chapter 7 bankruptcy? They do this because they have to. When anyone files any chapter of bankruptcy, the Automatic Stay (Bankruptcy Code Sec. 362) goes into effect immediately. In general, the Automatic Stay prevents creditors, including student loan lenders, from all types of collection activities while the bankruptcy case remains open, unless the Bankruptcy Court grants relief from the stay (or in certain situations involving auto loans, when the Automatic Stay expires earlier).

The Automatic Stay is a powerful protection designed to give the debtor some breathing room from creditors and their collection tactics as soon as her bankruptcy case is filed. It places a pause on wage garnishments, law suits already pending, evictions and foreclosures, and generally prevents creditors from making any demands for payment while it remains in effect.

What does this have to do with automatic debit payments to a student loan? With automatic debits, the payee or creditor is proactively pulling the money from your account, and this act constitutes a collection that is barred by the Automatic Stay. Therefore, unless your bankruptcy attorney believes that you have a good chance of discharging your student loan through an adversary proceeding, and she has agreed to take this separate litigation on in connection with your Chapter 7 bankruptcy, you are probably better off making voluntary payments by mail to the address provided by your student loan lender while your bankruptcy case remains open and the Automatic Stay remains in effect.

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