If you are the cosigner on someone else’s student loan, in most courts you cannot discharge your obligation to repay that loan unless you meet bankruptcy’s undue hardship standard. This is a difficult, although not impossible, standard to meet. Read on to learn what this means if you are a parent, spouse, relative or nonrelative of a student loan borrower and you consigned that person’s student loan.
Discharging Student Loans in Bankruptcy
Although most unsecured debts are discharged (wiped out) in bankruptcy, student loans are different. If you want to discharge a student loan in bankruptcy, you must bring a separate action within your bankruptcy case (called a complaint to determine dischargeability) and demonstrate to the court that repaying your student loan would cause undue hardship for you and your dependents.
What constitutes undue hardship varies from court to court, although most courts follow the Brunner test, which requires the bankruptcy debtor to meet all of the following three criteria in order to discharge a student loan:
- Poverty. Based upon your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you are forced to repay your loans.
- Persistence. Your current financial situation is likely to continue for a significant part of the repayment period.
- Good faith. You have made a good faith effort to repay your student loans.
To learn more about the Brunner test, other factors courts consider, and the changing landscape of student loan discharges, visit our Student Loans in Bankruptcy topic area.
Cosigned Student Loans in Bankruptcy
What if you didn’t actually take out the loan to provide for your education, but instead merely cosigned a student loan with someone else, perhaps a child, spouse, or other relative? If you file for bankruptcy, must you still meet the undue hardship test in order to discharge your obligation to repay the student loan?
Cosigned Student Loans in Bankruptcy: The Past
Some time ago, courts came out both ways on the question of cosigned student loans. Some would discharge the student loans of a cosigner without requiring the cosigner to meet the undue hardship test; others would not.
Recent Decisions on the Dischargeability of Cosigned Student Loans
Recently, most bankruptcy courts considering this issue have ruled that a cosigner on a student loan is subject to the same discharge standard as the student loan borrower. The only federal appellate court to consider this issue, the Third Circuit Court of Appeals, came to the same decision. In re Pelkowski, 990 F.2d 737 (3rd Cir. 1993). This means that if you want to discharge your obligation to repay a student loan that you cosigned, you’ll have to meet the undue hardship test.
Keep in mind that the court will consider the factors as they relate to you, and not to the student for whom you cosigned the loan. So, for example, if you are living in poverty, you will most likely meet the first prong of Brunner, even if your son (the student borrowr) is a top-flight lawyer in New York. On the flip side, if your daughter is making minimum wage after graduating from college but you are well-off, you probably won’t be able to discharge your obligation to repay a student loan you cosigned with her.
If the Student Borrower Discharges the Student Loan, You Are Not Off the Hook
The bankruptcy discharge applies only to the bankruptcy filer’s obligation to repay the debt. If the student you cosigned a loan with files for bankruptcy and discharges his or her obligation to repay the loan, you are still on the hook for the debt. Likewise, if you, as the cosigner, are able to discharge your obligation on the cosigned student loan, the student for whom you cosigned will still be on the hook for the debt.
There is a bit of a reprieve, however, if you file for Chapter 13 bankruptcy. In that type of bankruptcy, the automatic stay (which prohibits most collection efforts during the bankruptcy case) will apply to the cosigner as well. So if your son files for Chapter 13 bankruptcy and you cosigned a student loan with him, the student loan creditor cannot attempt to collect the loan from you during your son’s bankruptcy (unless the creditor successfully petitions the court to remove the stay). In Chapter 7 bankruptcy, however, the automatic stay won’t stop collection actions against nonfiling cosigners. (Learn more about what happens to cosigned debts in bankruptcy.)