In a previous article, I delved into the issues that can arise when a student loan cosigner dies, and how to best deal with any problems that may result. This time around, I will talk about a rarer, though sometimes more problematic dilemma: what to do when a cosigner declares bankruptcy. While renegotiating the terms of the student loan may still be an option, the worst case scenario (an automatic default) is what commonly occurs. In this article, I will talk about my own personal experiences with this difficult situation, and hopefully provide you with ways to overcome any troubles that you may encounter.
When I searched for cosigners for my student loans, I was limited in the number of family members that were able (based on their credit history) and willing to assist me. I ultimately got lucky when my grandmother (as discussed in my prior article) and another relative agreed to help. This close family member cosigned a $12,000 student loan I borrowed to cover the cost of my sophomore year of college.
Everything went smoothly with this student loan until I was starting my last year of medical school. Around that time, this individual was facing significant financial burdens, stemming from months of unpaid wages and a foreclosed house (this all happened during the Great Recession, after all). As a result, this family member ultimately decided to hit reset, by declaring bankruptcy. While I definitely knew about my relative’s bankruptcy, I was absolutely oblivious about how this decision could potentially affect me. At that time, I was already making steady (above minimum!) payments on my private student loans, including the one cosigned by my grandmother, which I had already renegotiated following her passing.
One day, I went to the bank’s website to make my usual monthly payment on this other private loan, but when I logged in, I noticed that there was no longer a loan associated with my account! I tried to log in a couple more times that day, but the same thing happened each time. I figured that maybe there was a glitch with the website, and I did not think much of it for the next few days or so.
After seeing the same thing on that damn website over the next few weeks, I finally realized that maybe I should call the bank to see what was happening. When I finally was able to speak to a real-life person, I was robotically informed, to my horror, that my loan was in default. Despite making above-minimum payments every month, my loan was now heading to collections, and I would be contacted shortly by the agency to discuss potential repayment plans.
Sure enough, later that week, I received a letter in the mail with information on how to contact the collections personnel. After calling the new owner of my debt, I was thankfully able to negotiate a monthly repayment scheme (that required me to make payments three times larger than my prior monthly payment amount), thereby avoiding a huge ding on my credit history.
In order to make the payments, I had to work additional hours at my tutoring job, while still pushing through the final year of medical school. I continued to make these payments throughout much of my first year of internal medicine residency as well. Thankfully, after filing my tax returns that year, I had a huge boon, and received several thousand dollars back in my tax refund (tuition costs are tax-deductible FYI). At that time, I had a little over $6,000 dollars left to pay back, and had about $4,500 in savings.
I decided to call the collection agency, to see if I could make some sort of deal. When I called, I asked them if there was any way that I could pay one lump sum, and be done with the loan once and for all. They seemed interested, and said for about $5,200, the loan could be completely wiped out. When I said I only had $4,500, but that I could give this money to them immediately, they ultimately agreed on the deal. After paying them this money, I received a letter in the mail two weeks later saying that the agreement had been fulfilled, and I had completely paid back my loan. I was finally done with this whole debacle!
While a cosigner bankruptcy definitely proved to be stressful for me, it ultimately helped me in the long run. I paid off the loan much faster than I would have otherwise, and as a result, I spent much less on accrued interest. In fact, with the loan handed over to a collection agency, I was able to negotiate an extremely favorable repayment plan (I guess they figured a large sum of money upfront was more palatable than a prolonged repayment scheme over months to years). I estimate that with these negotiations, I ultimately just paid back the value of the principal balance, and probably saved thousands of dollars in accrued interest.
In this sense, I definitely turned lemons into super sweet lemonade. While this horrible situation ended up being somewhat advantageous for me (although I did have many restless nights because of it), there are certainly ways to avoid this circumstance altogether. For one thing, communication is key. While I vaguely knew of my relative’s bankruptcy, I did not think to inform the bank that owned the student loan of this crucial financial change. I am sure that if I had called the bank beforehand, and warned them of my relative’s impending bankruptcy, I probably could have renegotiated the student loan right then and there and avoided the automatic default (but I probably would still be paying off the student loan to this day).
Dealing with student loan cosigner dilemmas can be anxiety-inducing, but I hope that I have provided you with some solutions for fixing any problems. In my next article, I will talk about why it is super important to keep records related to student loans and repayment agreements. Borrowers of student loans are extremely vulnerable, and can be taken advantage of by various tricks and scams. My next article will hopefully convey how to nip these issues in the bud whenever you encounter them.
Adam Rothman is a guest writer for Student Debt Diaries and is currently a medical professional in the New York City area. He is a brother of Jordan Rothman, the founder of Student Debt Diaries. You can reach Adam through email at adam@studentdebtdiaries.com