The circumstances in which student loans are dischargeable are often discussed by New York bankruptcy lawyers. More recently, the question of whether debtors who owe education loans to the federal government are obligated to enroll in income-sensitive repayment plans has come up. Another situation that’s likely to cause headaches is what happens to people who co-sign student loans (usually parents, but not always) and the primary debtor defaults, files bankruptcy, or dies. Here are a few points about co-signing that should answer most basic questions:
- Private lenders are more likely to require co-signers than the federal government is. Private student loans typically have lower default rates as a consequence. The type of federal loans where parents are usually involved are Parent PLUS loans, but those are lent directly to parents to pay for their children’s tuition costs, so they aren’t really co-signers. There are some cases, such as when the debtor already has a poor credit history, that the federal government will require a co-signer. Incidentally, the government is trying to tighten standards on Parent PLUS loans, which are not eligible for income-sensitive repayment plans.
- Lenders will take co-signed loans into account when assessing co-signers’ creditworthiness for other loan products, such as debt-to-income ratios.
- If the debtor fails to make payments on the loan and the lender assesses penalties like late fees, then those penalties will be passed to the co-signer no matter how high or arbitrary they are.
- Likewise, the co-signer’s bankruptcy rights will be the same as the debtor’s. The co-signer will have to prove that repaying the loan would be an “undue hardship” as it’s defined in the debtor’s federal circuit (the Brunner test for New Yorkers).
- If the debtor dies, then what happens next depends on the type of loan. If it’s a federal loan, it can often be either discharged or canceled through administrative (non-bankruptcy) mechanisms. Private loans, however, will pass to the co-signer, who will have to assume payment even though the debtor whom the education was supposed to benefit is dead.
- On the bright side, there are situations in which the co-signer can be released from the loan. The loan agreement might specify the conditions under which release is possible, but it’s typically several years of timely payments. Obtaining a release is usually a good idea.
Co-signing a student loan can put parents or others at a serious disadvantage if the debtor defaults, dies, or is no longer able to work. If such a tragedy occurs, it’s a good idea to discuss the situation with a New York bankruptcy lawyer.
For answers to more questions about co-signed student loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy trustee Bruce Weiner for a free initial consultation.
