Does Filing Bankruptcy Affect a Student Loan Cosigner?

Cosigners remain responsible for discharged student loan debt.

Bankruptcy's effect on the student loan cosigner depends on whether the bankruptcy court discharges the student loan debt. A bankruptcy discharge means the debtor is no longer legally responsible for the debt. As a general rule, bankruptcy law makes most student loan debt nondischargeable. However, under certain circumstances, the court can discharge the debt, and when it does, the debt will become the cosigner's responsibility.

Cosigning

Cosigning a student loan means taking responsibility for someone else's student loan debt if that person does not pay. The reason for the debtor's nonpayment rarely matters to the loan's creditor. Accordingly, if you cosigned a student loan with a student who later filed for bankruptcy and received a discharge of his student loan debts, then the creditor will hold you solely responsible for paying the loan. Fortunately, student loans are not easily discharged.

Dischargeability

Student loan cosigners have little to fear from the student's bankruptcy because most student loan debt is nondischargeable. A bankruptcy discharge relinquishes the debtor of his obligation to pay the debt. However, the bankruptcy code has a long list of debts that a debtor typically cannot discharge in bankruptcy, and student loan debt made the list. According to bankruptcy law, a debtor may not discharge a student loan that was completely or even partially government made, guaranteed or insured. Student loans that were partially or completely funded by nonprofit institution are also nondischargeable. Basically, unless the loan is completely unconnected with the government or a nonprofit institution, the cosigner will generally remain un-phased by the student's bankruptcy. That is, unless the debtor can show an undue hardship.

Undue Hardship

A student loan cosigner has cause for concern if the student can prove his student loan debt imposes an undue hardship on him. The existence of an undue hardship is the one exception to the general rule that student loan debt is nondischargeable. The New York case of Brunner v. New York State Higher Education Services Corporation set the present day standard for determining undue hardship. According to Brunner, a debtor "must establish (1) that he cannot maintain a minimal standard of living for himself and his dependents, based on his current income and expenses, if he is required to repay the student loans; (2) that additional circumstances indicate that his inability to do so is likely to exist for a significant portion of the repayment period of the student loans; and (3) that he has made good faith efforts to repay the loans."

Credit Report

A student's bankruptcy do not appear on the student loan cosigner's credit report. This is true of mortgages and other cosigned debts as well. The bankruptcy is attached to the debtor's Social Security number, not the cosigner's. Accordingly, the cosigner does not have to worry about having the student's bankruptcy listed on his credit report. If the student stops paying the student loan, however, the delinquency will appear on the cosigner's credit report. This, however, would be true regardless of whether the student filed for bankruptcy relief.

References

• Cornell University Law School: U.S. Code
• Brunner v. New York State Higher Education Services
• Experian.com: Credit Advice