Question:
Dear Steve,
I took out a lot of private student loans during undergraduate school. My mom makes good money, so I was ineligible for need-based aid. However, she didn’t help me with tuition. I could have been more responsible with what I spent it on, but hindsight is 20/20. My private loans have all at least doubled because of the interest (some have tripled).
Also, my mom co-signed for two of the loans. She did say she is willing to help me make payments on those two loans, but none of the others.
I also have federal loans from both undergraduate and graduate school, but I am on IBR for those so there is no issue there.
I negotiated with Navient for a monthly payment of about $700, but that has become unsustainable. I spoke with a bankruptcy attorney about Chapter 13, but I’m hesitating because I don’t want to have to include my federal loans in the bankruptcy. I work in the public sector and am really counting on the public service student loan forgiveness, and I know that that gets put on hold during the bankruptcy. I also may return to school in the near future, and I don’t want a bankruptcy to affect my eligibility for federal student loans.
Default does not make me very nervous. I share a home with someone, but my name is not on the mortgage. And aside from a car, I don’t have any property they can come after.
1. Should I do the bankruptcy, or just let my private loans go into default? Which would hurt me more?
2. In either instance (bankruptcy or default), what would happen to my mother as the co-signer?
3. How does either bankruptcy or default affect my chances of getting federal student loans in the future?
4. Is there any way to declare bankruptcy without including my federal student loans?
Brenda
Answer:
Dear Brenda,
Let me lead off with the good news. A completed bankruptcy does not impact your ability to get future federal student loans.
The rest of the story gets a bit more problematic.
Bless our family and friends who think they are helping us out by cosigning. They mean well but typically don’t understand what they are getting into. The sole role of the cosigner is to be the person the lender goes after if the loan defaults. The cosigner is 100 percent responsible for all payments on the loan if the loan becomes delinquent or the borrower is declared bankrupt.
A Chapter 13 bankruptcy is a strategy to deal with giving some breathing room for people buried in private student loan debt. In the range of no great options for private student loans, it’s a legal option that gives you some protection. However, at the end of the bankruptcy you will still have the loans. I’m confident your bankruptcy attorney discussed this with you.
If your Chapter 13 bankruptcy did not result in some repayment of the debt, the lenders could request the cosigner protection be removed and they could go after them. Again, you’d need to talk to your bankruptcy attorney about how often they see this happening in your area.
When you file for bankruptcy you have to list all your debts, you don’t get to pick and choose. Even if you don’t list a debt, it’s still technically included in the bankruptcy anyway. This protects people who accidently forget to list a debt at the time they filed.
At this point it seems to me you have two logical solutions to ponder. The first would be to find a bankruptcy attorney in your state who has experience with private student loans and is familiar with that part of the private loans that was not used for a qualified educational expense being unprotected and dischargeable in a quick Chapter 7 bankruptcy. See These Private Student Loans Can Be Easily Discharged in Bankruptcy. Since you mentioned you may have used the loans for things other than school, there might be something to explore here.
You should also read this and this.
It is a very nuanced and unexplored area that most bankruptcy attorneys are not familiar with.
The next option would be to negotiate with the private student loan lender. This would either be to get a co-signer release for your mom and remove her from the picture or to take this a step further and strategically default on the debt and negotiate an overall settlement. Lately I’ve seen a number of instances where the total settlement on the private student loan was just a few thousand dollars more than the co-signer release. So why not negotiate a solution on the entire debt.
This approach is very technical, carries risk, will impact the credit of you and your mother, and should only be conducted by someone who can give you specific and personal advice regarding the current policies of lenders as it exists today. I might be biased but my friend, debt coach Damon Day, is someone I would recommend as an expert in this area. Damon and I talk daily and I’ve mentored him for years. He is exceptionally skilled at taking the larger picture and crafting a comprehensive solution based on a number of moving parts.
There is not going to be a magic solution here, but there is a solution. The hardest part at times like these is having the mental fortitude to face a difficult situation when you are feeling overwhelmed, stressed and often blue.
Protection under the law is always my preference but negotiating is a better option in the face of no other solution. As an example of some results when having an attorney by your side if you default and are sued on the private student loans, look at this page.
