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Everyone Should Learn a Little about Law

Dealing With Student Loan Debt That Persist After A Debtor Dies

23 February 2015

Kaylee Wells

Student loans are the most persistent debts a person can have. Not only is the debt non-dischargeable in a bankruptcy, it may get passed onto family and friends if the original debtor dies while still owing money on the loan. Here's more information about this phenomenon and how you can use bankruptcy laws to deal with persistent student debt.

Trickle-Down Debt

The issue of inherited debt comes about when a person cosigns for a loan, making the individual as equally responsible for the money owed as the primary debtor. If the primary debtor stops paying on the loan, the lender typically goes after the cosigner for the balance due. Even if the debtor dies, the creditor will usually still attempt to collect money from the surviving cosigner.

While this can be upsetting for friends and family members left behind, it's legal for both the government and private institutions to hold cosigners responsible for lingering unpaid student loan debt. However, the federal government has changed its policy and now cancels the student loans it holds upon debtors'—or, in certain circumstances, the cosigners'––deaths.

Unfortunately, very few private lenders have death and disability clauses that dictate how the loans will be handled should the debtor become severely incapacitated or die. In most cases, either the creditor's policy is unclear or doesn't exist at all. One family learned this the hard way.

When their son died, the parents found that his student loan lender didn't have a clear policy about how to handle the $50,000 he still owed. The bank automatically placed the burden of the debt onto the cosigner on the loan, the young man's father. At first the bank refused to forgive the loan despite requests by the family to do so. It wasn't until after the issue gained national media attention that the bank finally discharged the debt.

The family is now working to get a law on the books that would force private lenders to cancel the loans of debtors who die or become too incapacitated to repay the money. The petition is still making its way through the legislative process.

Stopping Student Loans from Rising Again

As noted previously, it's very difficult to get student loan debt to go away. The only silver bullet that works is to pay it off completely, which can quickly become an unreasonable expectation when the person who took out the loans dies or falls into a coma. You can petition the lender to cancel the loan. The success of this tactic, though, will often depend on the creditor's good will if the company doesn't already have an existing policy in place that covers your particular situation.

However, you may be able to use bankruptcy laws to wipe out student loan debt or at least make repayment easier. As noted previously, student loans generally are not dischargeable through bankruptcy. In certain circumstances, though, the court will wipe out the loans if you can prove repaying them will cause you undue hardship.

The court will look at several factors when determining if you qualify for a hardship exemption:

• Income: The court will look at your income and assets and determine if repaying the loan will prevent you from maintaining a minimum standard of living for yourself and/or dependents.
• Persistence: The court will also look at your circumstances to see if your financial situation will likely continue for most or all of the repayment period. For example, if you're disabled and unable to work, then the court may find that your situation will persist and make it exceedingly difficult for you to repay the loan.
• Good faith: This can be tricky because the court may require you to make an effort to repay the loan before considering discharging the debt. It may or may not take the payments made by the primary debtor into consideration.

Most courts will take an all or nothing approach to their decision. Either you will qualify for the exemption or you won't. If you don't qualify, you can still use chapter 13 bankruptcy to reduce the monthly payments you have to make to lenders, which may make it easier to repay the money owed.

Be aware that bankruptcy will only wipe out your obligation to repay the money. If the primary debtor is merely incapacitated, he or she will still owe the money unless you take steps to clear the individual's responsibility for the debt, such as filing for bankruptcy on the person's behalf.

Pursuing a hardship exemption involves some complex legal maneuvering. It's a good idea to contact a bankruptcy attorney who can help you navigate the system to achieve the outcome you want.

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