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How Bankruptcy May Cause More Student Loan Problems

mouse trap of moneyBeware the trip wire of default when filing for bankruptcy.

When you file for bankruptcy, all collection activities must stop against you. For Chapter 13 bankruptcy cases, that protection from collections extends to co-signers and guarantors on your loans.

This important consumer protection, called the automatic stay, is a cornerstone of the bankruptcy laws.

For some, however, the automatic stay can be a disaster.

Automatic Payments On Private Student Loans Stop

When someone obligated to repay a private student loan files for bankruptcy, all automatic payments stop immediately.

This is the case even is the person making the payments is not the one who has filed for bankruptcy.

If you’re not watching your bank account closely, you may not even realize when the payments stop flowing to the student loan company.

Lenders May Not Accept Payments

When someone obligated to repay a private student loan files for bankruptcy, the lender may not accept voluntary payments.

The rationale some lenders follow is that some types of bankruptcy leave your income subject to the control of the court; rather than try to figure out if that applies to you, the lender simply stops cashing the checks as they come in.

Bankruptcy As Default

Some private student loans contain a provision that causes the loan to default if either the borrower or co-signer files for bankruptcy.

If that’s the case for your loan, then you need to be prepared to see your loan go into default as soon as you file for bankruptcy.

Eyes Wide Open

Many bankruptcy lawyers don’t know about these immediate consequences of filing for bankruptcy on your private student loan, most likely because so few attorneys understand student loan law.

That’s why it’s important to have a basic understanding of your financial situation and how any debt resolution move will impact you.

This is not to say that you shouldn’t file for bankruptcy if you’ve got private student loan obligations. Bankruptcy may still be your best option for any number of reasons, but it is your responsibility to understand all of the potential ramifications.

Comments

  1. This is exactly why nobody should file bankruptcy without an experienced attorney by their side.

    To comment on your article, I can’t say that I have ever seen a non-dischargeable creditor refuse a voluntary payment simply because the debtor is in bankruptcy. It is definitely something to keep in mind, but this could easily be remedied by contacting the creditor pre-filing.

  2. Excellent commentary!

  3. Bankruptcy can be a good device for getting oneself out of an untenable situation. But as Mr. Cohen points out there are also some pitfalls with student loans. there are also additional income tax consideration. So, in filing a bankruptcy petition you need to be sure that your attorney has taken all of the factors, that can come back and bite you hard, into consideration

  4. A potential bankruptcy debtor has an educational loan for schooling to receive commercial helicopter pilot’s license. The school filed bankruptcy and closed while the student was enrolled after paying $70,000 from the loan. Is there any chance of discharging the debt other than through the hardship discharge? Many students were affected when Silver State Helicopters went bankruptcy and they had loans through Student Loan Xpress, Inc. and Xpress Loan Servicing.

    • Joshua Cohen

      There were class actions all over the place for that particular school. In the settlements, many loans were forgiven on a pro-rata percentage based upon how much of the program was completed. You should take a look to see if your client was included to make sure the forgiveness occurred.

  5. Tammy Parady

    I WOULD LIKE TO ASK SOME QUESTIONS ABOUT PARENT PLUS LOANS,I CO-sIGNED FOR S PPL FOR MY SON (15000)$ at a privste school and yes they did take my tax refund last year,does thst qualify as a payment on the loan? what can I do so that I can get my tsx refund back this year and get out of default?

    • Joshua Cohen

      You didn’t co-sign for your son, the loans are yours, not his. As for getting out of default, please contact my office or one of my graduates to learn about all of your options.

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