As a general rule, student loans are “non-dischargeable” debt, which means the debt will remain after a Chapter 7 or Chapter 13 bankruptcy. This applies to both the original debtor and any co-signor. If you cosign on a student loan, filing for bankruptcy protection will not eliminate the debt. As with any debt involving a cosigner, the creditor has the option of pursuing the cosigner if the original debtor defaults on the debt. The only savings provision is if the original debtor files a Chapter 13 case. In that instance the automatic stay prohibits creditors from attempting to collect the debt from a cosigner. The stay is limited to the time-frame of which the Chapter 13 case is pending and terminates if the case is closed, dismissed or converted to another Chapter. A creditor can also petition the Court to lift the stay for various reasons including harm to a creditor or if the Chapter 13 repayment plan does not provide for full payment of the debt.

The only exception to the general rule that student loans are non-dischargeable, are in the cases of “undue hardship.” Under the “undue hardship” exception, the bankruptcy court can discharge or eliminate the debt if the payments put an extreme burden on the debtor. This requires a separate motion and a meeting with the judge to explain your hardship. In order to convince the judge a debtor must demonstrate that he or she cannot maintain a minimal standard of living and repay the loans; that the financial situation is likely to continue; and that an honest effort has been made to pay off the loans. Although in these economic times it may seem like a simple task, undue hardship exceptions are rarely granted unless. For example in Cockels v. Mae, 414 B.R. 149, 151-153 ( E.D. Mich. 2009), the court declined find an undue hardship for a cosigner debtor, who inherited the debt from an ex-husband after he defaulted on the loans. After reviewing the debtor’s financial situation, the court concluded that her remaining monthly expenses could be sufficiently reduced to cover the student loan payment while maintaining a minimal standard of living. In reaching its conclusion, the bankruptcy court found that the debtor had the potential of reducing her monthly rent payments and travel expenses by moving to a less expensive neighborhood closer to her job. Consequently, if you are faced with student loans or are a cosigner of a student loan, you can expect to retain that debt after filing for bankruptcy protection unless you are physically unable to work. Of course, every situation is different and an experienced bankruptcy attorney will be able to advise you of the best course of action if you believe you have grounds for a hardship exception.

- Richard V. Stokan, Jr.