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Getting Out From Under A Co-Signed Student Loan

April 6, 2012

Private student loans are not guaranteed by the government. Since the 2005 bankruptcy amendments, private student loans are also not dischargeable in bankruptcy without showing how repaying the student loan will cause an "undue hardship" on the debtor. So how does a bankruptcy debtor get rid of an obligation for a co-signed private student loan?

When you co-sign for a student loan you agree to become "jointly and severally" indebted on the loan. If the borrower fails to pay the loan, you can be held 100% liable. Since private student loans are not backed by the government, the interest rate is often very high and collection efforts are very aggressive.

Many lenders, such as Sallie Mae, offer a co-signer release after the borrower establishes a successful payment history and meets credit criteria. Basically, once the borrower has shown a responsible credit history after graduation, the lender will release the co-signer. In the case of Sallie Mae, the borrower can apply to release the co-signer after making 12 consecutive monthly on-time principal and interest payments. The lender will also review the borrower’s other credit obligations and income before releasing the co-signer.

Section 523(a)(8) of the federal Bankruptcy Code establishes the undue hardship requirement for discharging student loans. Some courts have said that this section does not apply to co-signers of student loan debt. Additionally, Congress recently introduced legislation to permit the discharge of private student loans, so it may be possible to discharge the co-signer’s obligation in the near future.

If you are the co-signer of a student loan debt and need bankruptcy relief, speak with an experienced attorney and discuss your situation. Regardless whether you are able to discharge the obligation, bankruptcy can afford temporary relief through the automatic stay. During your bankruptcy case you are able to avoid payment or establish a repayment schedule to pay the student loan debt. Talk to your bankruptcy attorney and see how the federal law can help you.


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