Bankruptcy and Student Loan Co-Signers
What happens when your student loan co-signer declares bankruptcy? According to a recent article in Reuters, student loan borrowers can end up in default if one or more of their loans has been co-signed by a parent or other adult who decides to file for bankruptcy protection. The same is also true if the co-signer dies while the student owes the debt. And as most of us know, the students in these cases don’t usually have the option to file a Chapter 7 bankruptcy to contend with mounting student loan debt—student loans generally aren’t discharged during a bankruptcy proceeding.
Bankruptcies involve many complex issues. And as the recent Reuters article emphasizes, one person’s decision to declare bankruptcy can have significant consequences for other people with whom they have financial connections. Do you have questions about consumer bankruptcy in the Chicago area? The experienced Oak Park bankruptcy attorneys at the Emerson Law Firm can answer your questions today.
Co-Signer Bankruptcy and Automatic Defaults
So how do automatic defaults happen, and why aren’t more student borrowers anticipating this problem? According to a report published by the Consumer Financial Protection Bureau (CFPB), “many student lenders stipulate that the balance of a loan will come due if a parent, grandparent or other co-signer becomes unable to share responsibility for the loan.” In other words, even if the borrower has been making timely payments, a co-signer’s decision to declare bankruptcy can “mean the borrower may be automatically put into default.”
Yet many borrowers don’t understand the nature of an automatic default or the way a co-signer’s bankruptcy or death can affect them. Indeed, the recent CFPB report arose from complaints from borrowers about automatic defaults. Rohit Chopra, the CFPB’s student loans ombudsman, explained that borrowers and regulators in general “do not know how common automatic defaults are in the broader private student loan market.”
Is the connection between bankruptcy and automatic default one that primarily plagues the private student loan industry? In short, the answer is yes. The CFPB emphasized how part of its current efforts aimed at protecting consumers including “shin[ing] a light on potential pitfalls in the private student loan market.”
In terms of regulators knowing little about this increasing problem, Reuters cited Richard Hunt, the chief executive of the Consumer Bankers Association, who indicated that he “had not heard of lenders placing borrowers into default when their co-signer died or declared bankruptcy,” and he described such as a situation as “likely a rare occurrence.” Yet according to Chopra, the CFPB has heard from a surprising number of private loan borrowers who have been affected by these practices.
What can borrowers do if they have loans with co-signers who may declare bankruptcy in the near future? First, borrowers should contact their lenders. In some cases, it may be possible to “release their co-signers from responsibility,” according to the CFPB. However, Chopra indicated that most borrowers have found this process to be very difficult, and many former students who are working to repay private loans may be dealing with the burdens of another person’s bankruptcy.
Contact a Chicago Bankruptcy Attorney
If you have questions about how bankruptcy and lending practices for private student loans may affect you, don’t hesitate to contact an experienced Chicago bankruptcy lawyer. At the Emerson Law Firm, we have been helping clients in the Oak Park area for years and can take a close look at your case today.
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