Q: I understand about government backed students loans and interest cannot be discharged without getting a favorable ruling
In an adversarial proceeding. Are those loans allowed to continue interest during the pendency of the Chapter 13 proceeding unlike other creditors who cannot continue to add interest.
A:
If you have a confirmed plan that proposes to pay allowed general unsecured claims a percentage of the creditor's claim, the student loan claim will only be paid the percentage that was to be paid on the claim as it existed on the date the bankruptcy petition was filed. However, the student loan lender can apply the payments received during the plan to interest first if that is the manner in which the payments are to be applied per the promissory note and state law, with any portion over the interest being applied to principal for the purpose of determining what you owe once you receive your discharge.
If your plan proposes to pay 100% to unsecured claims with no interest being paid to unsecured claims, then the student loan lender will still be able to apply the payments being made 1st to interest with the remaining portion of each payment above the interest to the principal balance of the loan. However, as stated above, the student loan will not be able to collect the interest during the plan unless the confirmed plan authorizes that.
It does not matter how the creditors that hold dischargeable general unsecured claims apply the payment. If the creditors choose to apply the payments in the manner stated above, the entire unpaid balance that remains upon completion of the plan and receipt of a discharge is discharged. However, if your case is dismissed, you lose all the benefits of the chapter 13, including the fact that the interest was going to be discharged. That creditor can then add to the claim all of the interest, late charges and other cost that accrued after the petition date, provided the creditor is allowed to charge the interest and cost under the promissory note and under state law.
The automatic stay precludes any holder of a claim to attempting to collect anything above the amount being proposed to pay that lender through the plan, but does not preclude the lender from choosing how to show the payments are being applied within the lender's accounting system.
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