Oct 6

More on Co-maker/guarantor Liability Relief from Student Loans in Bankruptcy


I work in North San Diego County with offices in Carlsbad and San Marcos.  I serve clients in the areas of Bankruptcy, Elder Abuse and Probate, and I litigate those areas of law; always figured if your license allowed to carry a big stick it was not much good if you were unable or unwilling to use it when needed.

Several months back I wrote an entry about co-maker/guarantor liability in Bankruptcy.  It turned out to be pretty popular and I received some requests for more information, especially concerning co-making or guarantying student loans.  What I can say is the law is a living thing and changes over time.  In the early days student loans could be discharged in bankruptcy.  Unfortunately, too many students decided it was easier to take the loan, get the education, then discharge the debt in bankruptcy.  In the 1970s congress responded with 11 USC 523(c)(8) which excepted student loans from discharge.  Back then the court’s, relying on legislative history, started to rule that the exception to discharge did not apply to debtors who were co-makers or guarantors of the loan.  The thinking was that the guarantors or Co-makers did not really receive any benefit from the loan and it was not fair to deny them a discharge.  Congress changed the law to make it more restrictive and the courts began to rule that Congress intended to exclude the loan from discharge, not the person getting the loan.  This meant that the loan could not be discharged in bankruptcy, and since the guarantor or co-maker was obligated to pay the loan, their secondary obligation to pay the loan would not be relieved or discharged either.  Again, some of the legal reasoning changed in that the courts found that parents who guaranteed or co-made student loans actually did benefit from the loan and should not escape duty to repay.  This does not address the situation where the guarantor was not a parent or even a family member.  The cases kept getting more restrictive in granting discharge to co-makers and guarantors to the point that today, the majority rule is that co-makers or guarantors of student loans will not have their obligation to pay unless the loan came due 7 years before filing the bankruptcy petition and the debtor can prove by a preponderance of the evidence that repayment of the loan will cause an undue financial hardship upon the debtor and dependents.  And the debtor has to prove it; that means bringing a separate lawsuit inside the bankruptcy case and introducing evidence that shows paying the loan for another person is both a current and future undue hardship.  More on what constitutes an undue hardship later.   I am still trying to find the rational for denying discharge to a guarantor or co-maker on their secondary duty to pay if the student who received the loan cannot receive a discharge.  There is always more to learn in this business.

STEPHEN C. HINZE, COUNSELOR AT LAW works and plays in North San Diego County serving the communities of San Marcos, Vista, Oceanside, Escondido, Carlsbad, Encinitas, Rancho Sante Fe, Rancho Bernardo, Fallbrook and Temecula in the legal practice areas of Bankruptcy, Elder Abuse, and Probate.

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