Student Loan Cosigner & Bankruptcy: How it Works

How bankruptcy can help with cosigned student loan debtCan a cosignerCosignerA person who signs a loan agreement alongside the primary borrower and becomes equally responsible for repayment. Cosigners are common on private student loans when the student has limited credit or income history. on a student loan file bankruptcy?Bottom Line

Filing bankruptcy on student loans with a cosigner won’t wipe out the debt for them or the person who filed bankruptcy. And even if the primary borrower could prove repayment of the loans would cause their dependents an undue hardshipUndue HardshipThe legal standard a borrower must meet to discharge federal student loans in bankruptcy under 11 U.S.C. § 523(a)(8). Courts apply different tests, most commonly the Brunner Test or the Totality of the Circumstances Test., the cosigner would still be on the hook for the balance.

Bankruptcy typically has little effect on a student loan cosigner. It won’t show up on their credit report, so their credit score is safe. They also won’t have to worry about making monthly payments. The Department of Education and private student loanPrivate Student LoanA student loan issued by a bank, credit union, or other private lender rather than the federal government. Private loans generally lack federal protections like income-driven repayment and broad forgiveness programs. creditors put the accounts in forbearance until the case ends to avoid violating the automatic stay.

Most important, bankruptcy won’t eliminate your consigner’s liability for the debt. They’ll remain responsible for paying the balance no matter what happens in your case.

A bankruptcy discharge is personal. Whoever files the Chapter 7 or Chapter 13 bankruptcyChapter 13 BankruptcyA form of federal bankruptcy in which the debtor follows a three-to-five-year court-approved repayment plan. Student loan balances remaining after the plan are not automatically discharged and require a separate adversary proceeding. case is entitled to have their credit card bills, medical bills, and other unsecured debts wiped out.

Related: How to Prove Undue Hardship for Student Loans

How bankruptcy can help with cosigned student loan debt

Bankruptcy can help stop a student loan lawsuit against you and the cosigner. It also can help you both clear the student loan debt. But that process can be stressful, costly, and challenging to navigate.

Stopping a student loan lawsuit

If you’re being sued for a student loan, filing bankruptcy could stop the lawsuit in its tracks for you and the cosigner. It all depends on the type of bankruptcy case you file.

Chapter 7 bankruptcyChapter 7 BankruptcyA form of federal bankruptcy that liquidates nonexempt assets to pay creditors and discharges most remaining unsecured debts. Student loans are not automatically discharged in Chapter 7 and require a separate adversary proceeding. only protects the person who filed the case. The lawsuit can continue against the other person. So if the primary borrower files a case, the lender could still go after the cosigner. And if the cosigner files Chapter 7, the lender could go after the primary borrower.

Chapter 13 bankruptcy, however, will stop the lawsuit against the primary borrower and the cosigner, no matter who files the case. This type of bankruptcy has a special rule protecting codebtors from collection activity. The bankruptcy won’t appear in their credit history or affect their score. The creditor will get notice from the bankruptcy lawyer that the case was filed. Read more about being sued for student loan debt.

Wiping out the loans

Student loans can be discharged in bankruptcy if the person who filed for bankruptcy, known as the debtor, files an adversary proceedingAdversary Proceeding (AP)A separate lawsuit filed within a bankruptcy case, required to seek discharge of student loans. The borrower files the AP against the loan holder and asks the court to find undue hardship. and convinces the bankruptcy court that the student loan payments would cause them undue hardship.

The primary borrower can be the debtor. It could also be the cosigner if they file their own case. They can only file for bankruptcy together if they are married.

In the adversary, the debtor will need to prove they can’t make the student loan payments without undue hardship. The Bankruptcy Code doesn’t define the undue hardship standard, so courts created their own definitions and tests to measure it. Judges in a few jurisdictions can consider the “totality of the circumstances” in their decision. But in most of the country, judges apply a stricter interpretation known as the Brunner Test.

Regardless of which test is used, until recently, the chances of getting a discharge have historically been slim. Last year, the Justice Department and the Education Department released new student loan bankruptcy guidelines that aim to make it easier to prove undue hardship for federal student loans — specifically, Ed-owned student loans like Direct PLUS Loans.

Related: Student Loan Bankruptcy Reform

These changes are unlikely to have a significant impact on private student loans. But that shouldn’t be an issue. Private loans, in my experience, are easier to discharge than federal loans because private lenders don’t provide income-driven repaymentIncome-Driven Repayment (IDR)A category of federal student loan repayment plans that calculate monthly payments based on income and family size rather than loan balance. Any remaining balance can be forgiven after 20–25 years of qualifying payments. plans, student loan forgiveness, and so on.

Learn More: Can You File Bankruptcy on Private Student Loans?

Can a cosigner on a student loan file bankruptcy?

A cosigner on a student loan can file for bankruptcy, but they will remain responsible for the loan unless they take additional steps. To have the debt discharged through bankruptcy, the cosigner would need to file an adversary proceeding and pass the undue hardship test. Without taking these steps, the cosigner will remain liable for the loan even after filing for bankruptcy.

Bottom Line

Depending on your financial situation, using the bankruptcy process to deal with your student loan debt could be a good option — even if you have a cosigner. Mostly, your bankruptcy case won’t affect your cosigner. But it could leave them owing the balance if you get a student loan discharge.

Talk with your bankruptcy attorney or schedule a call with me. For the past decade, I’ve run a law firm that’s helped hundreds of private student loan borrowers like you, both inside and outside of bankruptcy court, find debt relief options in a way that protects them and their cosigners.

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