Student Loan Co-Signer

[Gauche1967]

Hypothetical situation: A student loan co-signer filed a Chapter 7 bankruptcy in 1997 and listed the student loan as a creditor. The BK was discharged. Of course, student loans are non-dischargeable, but let's say the loan contract (private loan) contained language that any bankruptcy filing was an act of default. Now, the primary borrower continued to keep the loan current for several years, but filed a Chapter 13 and made payments on the loan through the plan. The creditor did not ask the trustee for permission to pursue the co-signer at that time.

Now, if the co-signer's bankruptcy really was an act of default in 1997, does the co-signer have any statute of limitations or laches defense if they were sued for the loan now? Technically, the co-singer has been in default for 11 years. Keep in mind, it is a private loan, not a federal loan, so statue of limitation defense can apply.

[HHM]

lol, you are over thinking this....

The co-signer did not receive the education benefit of the loan, so the loan is fully dischargeable as a general unsecured debt as to the co-signer.

[Gauche1967]

Um, OK thanks. Do you have any case law on that? I thought there was a lot of case law the other way, that suggests even a co-signer's obligation is non-dischargeable.

[Gauche1967]

Here is a link to an article which seems to imply the co-signer's obligation is non-dischargeable as well.

http://www.orlandosentinel.com/business/orl-ymcosign2708apr27,0,4573763.story

[Gauche1967]

http://bulk.resource.org/courts.gov/c/F2/990/990.F2d.737.92-3309.html

Here is some case law concluding that the co-signer's obligation was not discharged. Its an old case, HHM has there been changes since? Thanks!

[HHM]

I stand corrected. I could have swore remember reading something about co-signers being able to discharge for lack of receiving the educational benefit. But, I have not found it.

Perhaps one route to try is to see if the lender will authorize release of the co-signer.

The problem with the BK default provisions, such provisions are nearly universally held to be invalid and unenforceable. (there is plenty of case law on that issue). In any event, your "hypothetical" does not state any sort of issue or concern. If the original borrower has paid, and continues to pay the student loan, what is the problem for the cosigner?

[lrprn]

Gauche, unfortunately no one here knows with any real certainty how this situation is going to play out. You are going to need real legal advice from an experienced bankruptcy lawyer familiari with all the nuances and interpretations of the law regarding student loan co-signers in your area.

Since the private student loan was made before 1997, that could make a difference in how the student loan is going to be treated in bankruptcy court now. Set up a few free or low-cost initial consultations with 3-4 bankruptcy lawyers in your area and find out what they think. Good luck - come back and let us know what you find out.

[Gauche1967]

Well, upon further research. It appears that there is case law both ways. Some courts have agreed with HHM's original logic that since the co-signer did not receive the educational benefit, they can discharge their obligation on the loan in bankruptcy. Other courts have ruled the other way. It would appear that the opinion that co-signer's can discharge their obligation is the minority opinion. Courts in the 8th circuit seem to go by this opinion, but the 3rd Circuit Court of Appeals has ruled the other way in re Pelkowski. There is case law that agrees with HHM's original opinion in my circuit, but it is rather old. Not sure what to do from here. Getting a lawyer to try to think outside the box on a student loan case is next to impossible.

[Gauche1967]

I stand corrected. I could have swore remember reading something about co-signers being able to discharge for lack of receiving the educational benefit. But, I have not found it.

Perhaps one route to try is to see if the lender will authorize release of the co-signer.

The problem with the BK default provisions, such provisions are nearly universally held to be invalid and unenforceable. (there is plenty of case law on that issue). In any event, your "hypothetical" does not state any sort of issue or concern. If the original borrower has paid, and continues to pay the student loan, what is the problem for the cosigner?

The problem is that the primary borrower will not be able to continue paying this loan forever, so will the co-signer have any recourse when they are pursued for the loan?