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Private student loans, co-signers and bankruptcy

| May 6, 2014 | Uncategorized |

In our previous post, we discussed how some private student loan borrowers are getting into trouble when their co-signer parents or grandparents pass away and their loans automatically default, requiring full payment and doing damage to credit.

The Consumer Financial Protection Bureau reported last month that the situation often comes as a complete shock as borrowers were unaware of clauses in loan agreements allowing lenders to do this.

In the last post, we also mentioned how the CFPB indicated that some private student loans are even defaulting when co-signers file for bankruptcy. Interestingly, it doesn’t appear that the co-signer’s responsibility for the student loan debt has to be discharged in bankruptcy in order for the automatic default to occur.

In fact, whether the co-signer will get the student loans discharged at all during bankruptcy is an issue in itself…

Student loans and bankruptcy are a very complex pairing. While bankruptcy is meant to provide people who are in too deep with debt a fresh start, it often is not successful at discharging student loan debt.

Merely listing student loan debt on a bankruptcy filing does not mean it will be discharged during the proceeding. It is only possible to discharge private student loan debt if three conditions can be met:

  1. The borrower made a good faith effort to repay the loan;
  2. If compelled to repay the loan, the borrower would not maintain a very basic standard of living; and
  3. The financial hardship is likely to last for the life of the loan.

Private student loans are treated the same during bankruptcy whether the person who is filing is the student who benefited from the loans or a co-signer parent or grandparent, which means that the three conditions must be applied to the bankruptcy filer’s situation and met in order to possibly qualify for discharge.

As you can see, student loan debt and bankruptcy create a very complicated situation for borrowers and co-signers alike.

Co-signers: Visit our page Student loans: not just a problem for the young for more information on discharging private student loans during bankruptcy.

Student borrowers:  Consult an experienced bankruptcy lawyer right away for more information on dealing with private student loan debt that has gone into default after the death or bankruptcy filing of a co-signer.

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