Bankruptcy and its affect on student loan debt

May 1, 2014 2:48 pm Published by

Sometimes New Yorkers get into costly situations — such as a divorce — that wipes out a large portion of their finances and assets. They may turn to bankruptcy to wipe out debt and obtain a fresh financial start. But what happens when parents file for bankruptcy while paying on their child’s student loans?

Bankruptcy often wipes out credit card debt, car loans and personal loans, but it usually does not do anything with student loan debt. Even if the debt is listed in the bankruptcy proceedings, it won’t get erased unless a complaint is made against the lender during the bankruptcy filing. It’s very rare that this happens because it is very expensive for someone to do. So unless this step is taken, the parent is still on the hook to repay the debt.

This means that the lender can still collect the unpaid balance through various means, such as wage garnishment, Social Security or through tax refunds. In addition, even if the child signed off on the student loan, the parent can still be held liable even in bankruptcy.

For those struggling with debt, bankruptcy can be a viable option. However, it doesn’t get rid of all debts. Most consumers will still have to pay back student loan debt unless they make the effort and pay the fee to take action and file a complaint. This is unfortunate because for someone who attended a private or Ivy League school, student loan debt can be huge — hundreds of thousands of dollars. This is something that should be considered before signing the loan paperwork, because consumers could spend several decades paying off this debt.

Source: FOX Business, “Does Dad’s Bankruptcy Erase Student Loan Debt?” Justin Harelik, Apr. 30, 2014

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