Many couples “help” their adult children. Some buy them cars, some provide down payments for cars or housing. Others pay cell phone bills. But one of the most common methods of financial assistance that parents provide their “grown up” children is with finances for college: student loans. In some cases, life can throw a wrench into all these careful (and helpful) plans. What happens to student loans and parent student loans when parents end up divorcing, declaring bankruptcy or both?
There are too many possible scenarios with too many various details to give one solid answer to what happens in these situations. But there are certain issues to consider when attempting to apply bankruptcy law to your life.
When parents get divorced, it is very common for one or both of the divorced parents to file bankruptcy. This is actually the most common situation that causes concern in relation to student loans, parent student loans and bankruptcy. The concern isn’t about who isn’t responsible for the debt, but who is. When a parent files for bankruptcy, does that leave the child or “student” more open to liability on the student loan debt that was previously pointed at the parent or parents?
Investigate Your Situation More: Eliminating Student Loan Liability through Bankruptcy
Did your child/the student sign for the loan/s? Whether or not the student signed for the loan is the first and most important information you need when trying to determine liability. In some instances, parents sign for the loans, but the students don’t. They then use the funding to pay for their child’s education expenses, but the liability belongs solely to the parents. The child benefits from the loan because their schooling is paid for, but they aren’t liable. If you aren’t sure if your child/student signed for the loan, have the student contact the lender and provide their social security number. They will be able to request proof that they signed for the loan from the lender directly. Is the student signed for the loan, they are liable regardless of the parent/s filing for bankruptcy.
In most cases, filing for bankruptcy will not eliminate liability for student loans. To eliminate a student loan through bankruptcy petitioners are required to undergo a specific step in the process that most people do not complete/do not qualify to complete. So in most cases of a bankruptcy filing, the liability on a student will not be affected in the least even though they will be listed in the list of creditors. Listing them alone does not discharge them or eliminate liability. Eliminating a student loan means filing an adversary complaint against the lender. Legally eliminating liability for a student loan would require the equivalent of a lawsuit against the student loan lender while the bankruptcy case is open. Sadly, most individuals who qualify for the elimination of student loan debt cannot afford to file the required adversary complaint. It’s a paradox: most in need of this type of relief simply cannot afford to set the right legal processes in motion to get it.
In most cases, when divorced parents are worried that a bankruptcy on the part of one or both of the parties will leave their child liable for student loans they obtained on their behalf, the worry is unwarranted. Most of these worries are based on a misunderstanding that the student loan liability was eliminated. Regardless, if you have questions about the effect bankruptcy could have on your loved ones, please get in touch with one of the experienced southern California bankruptcy attorneys at Westgate Law.