On more than one occasion, I have represented individuals in Chapter 7 and Chapter 13 bankruptcy cases when the debt that prompted the filing was wholly or in large part co-signed debt. It seems that underwriting standards for most large loans have become tighter and nowhere is this more true than in the case of student loans.
From the lender’s perspective, student loans can pose a significant risk. Unlike mortgages, there is no collateral to secure the loan. The borrower, of course, is a student who may or may not find suitable employment. Given that college and trade school loans can easily top $100,000, the likelihood of slow pays or defaults is high.
I am also seeing more and more cases involving student loans from so-called “for profit” colleges – usually vocational schools. According to the United States Department of Education, 34 million borrowers owe $713 billion, with $50 billion of these funds in default as of September 30, 2010.
Student loan debts are not dischargeable in a bankruptcy unless the debtor/borrower can show extreme hardship, which is a very hard result to accomplish. In the Northern District of Georgia, where I practice, a debtor generally must show compelling evidence – usually in the form of a chronic medical problem – that would prevent repayment of the student loan, and the judges here have been very reluctant to grant this type of relief.
I am also seeing more cases where the student loan lender is demanding a co-signer, usually a parent, but possibly grandparents or siblings. What happens when tragedy strikes and the primary borrower (the student) dies before he is able to pay back his loans?
If the loan is federally backed, (Stafford loans or PLUS loans), the student loan is discharged if the primary borrower (the student) passes away. If the loan is private, the death of the primary borrower does not relieve the co-signer from his or her obligation to pay. Since the rigorous “hardship discharge” standard applies to both federally backed and private student loans, a surviving parent or grandparent may be left with a lot of non-dischargeable debt.
Jonathan Ginsberg, Esq.
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Last modified: August 29, 2013