Cosigner Liability on Student Loans and Chapter 13 Bankruptcy – Part I


It is increasingly difficult for those who wish to earn a college degree to finance such education without incurring student loans.  The introduction and proliferation of student loans as a mechanism for the funding of students’ secondary education is in fact, the primary mechanism for the rapidly escalating costs of such pursuits.  Government involvement in the funding of student loans is the primary cause of the outrageous costs of secondary education.

A circular process occurs.  Student loans create the high price of a secondary education.  The high price of a secondary education means that most students are not able to finance such pursuit without incurring student loans.  Therefore, such students, in order to pursue a secondary education necessarily must incur additional student loan debt.  And so, the circle continues and expands.

Often, parents are enlisted as cosigners on the student loans incurred by their child or children.    Increasingly, often such children default upon such student loan obligations upon their exit from such secondary educational pursuits.  What is a parent to do when the student loan lenders or servicers thereafter seek compensation from the parent or cosigner?

The options are limited.  One may seek a release from the student loan obligation.  However, most student loan programs requiring a cosigner are private student loans.  A report by the Consumer Financial Protection Bureau found that 90% of private student loan borrowers who applied for a cosigner release were rejected.  For federal student loans, a cosigner is generally only required when borrowers are applying for parents Plus Loans.  A subsequent article in this series will discuss releases of cosigner liability from such student loans.

A cosigner may also be removed from liability on a student loan if the student loan is satisfied, or paid, by paying off the original loan or refinancing, with a subsequent loan.  This may not be an available option to many borrowers or cosigners.

In bankruptcy, the borrower or the cosigner can seek the discharge of the student loan upon a showing of undue hardship.  Most bankruptcy courts in determining undue hardship apply the Brunner test.  How the Brunner test is applied varies among jurisdictions.  It is generally very difficult to discharge student loans through bankruptcy.  However, numerous debtors have obtained such discharges, based on the particular facts of their cases.  One’s ability to discharge student loans in bankruptcy is a fact-based determination.

If a cosigner files Chapter 13 bankruptcy, such debtor may pay either a portion of the student loan, or even the totality of the student loan, through the bankruptcy, or the Chapter 13 plan.  Generally, student loans are paid in equal proportion to other unsecured creditors, according to the pro rata amounts of each of the creditors.

For example, a debtor has $20,000 in credit card debt, and cosigner liability on $20,000 in student loans, and the chapter 13 plan proposes to pay $10,000 to the unsecured creditors.  The credit card creditors will receive $10,000 or 50% of the total credit card debt, and the student loan lender or servicer will receive $10,000, or 50% of the total student loan debt.  Upon the completion of the Chapter 13 bankruptcy, the debtor will receive a full discharge of the debt owed to the credit card creditors.  However, absent any payments or effort by the borrower, the debtor in bankruptcy will still be subject to cosigner liability or obligation to the remaining $10,000 not paid through the Chapter 13 plan.  In addition, the $10,000 not paid through the Chapter 13 plan may be subject to additional interest or charges.

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