Beware 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.