What happens to Student Loans for Studying Abroad when you File for Bankruptcy?

Taking an education loan for studying abroad is like planting a tree in hopes of harvesting career success. You water it with time, effort, and financial support — usually from a bank or NBFC. The tuition fees, accommodation, and living expenses may spread across like roots, but this will make the tree stronger and bigger with many fruits, or say, future opportunities to reap, right?

But what happens when this carefully planted tree suddenly faces a rough season? Or maybe your career doesn't bloom as expected, and you are forced to declare bankruptcy? While situations like these are rare, it is always wise to be prepared, because smart students don’t just dream big, they plan smart too.

So, let us talk about something most students hardly ever think about — what happens to your overseas education loan repayment if you ever face bankruptcy.

What is Bankruptcy for Student Loans for Studying Abroad?

Bankruptcy, in simple terms, means a legal declaration that a person is unable to repay their debts. These loans are often co-signed by the guarantor and usually include a moratorium period. In India, education loans are considered unsecured debt under the Insolvency and Bankruptcy Code (IBC). Also, there are provisions in place for education loan bankruptcy filing, and the loans may not be wiped off easily.

So, while bankruptcy sounds like a reset, for student loans for studying abroad, it is rarely that simple — the financial responsibility still lingers.

Can you file for Bankruptcy on Student Loans for Studying Abroad in India?

While bankruptcy may sound like an escape from financial burdens, student loans—especially those taken for studying abroad—don’t get written off that easily, as mentioned. Here is a clear look at how it works under the Insolvency and Bankruptcy Code (IBC), 2016.

• Eligibility under IBC for Individuals: The IBC allows students to initiate insolvency proceedings. However, filing is subject to specific conditions under overseas education loan eligibility, and not all debts are discharged automatically.

• Education Loans Are Not Automatically Waived: Declaring bankruptcy does not lead to an immediate waiver of your overseas education loan. The adjudicating authority reviews your financial capacity, income, and intent before considering any relief.

• Co-Borrower Liability Remains: In most study abroad loans, a parent or guardian is a co-applicant. If the primary borrower files for bankruptcy, repayment responsibility may shift to the co-borrower.

• Resistance from Lending Institutions: Indian banks and financial institutions often contest education loan discharge claims. They typically view student loans for studying abroad as recoverable liabilities due to the borrower’s long-term earning potential.

What Happens to Student Loan Debt for Studying Abroad if Bankruptcy is Filed?

When an Indian student with an overseas education loan files for bankruptcy under the IBC (Insolvency and Bankruptcy Code) 2016, here is the actual step-by-step procedure that unfolds:

1. Insolvency Application is Filed Under IBC (Individual Insolvency Chapter)

The borrower should apply Part III of the Insolvency and Bankruptcy Code (IBC), 2016. The borrowers also need to prove they are unable to repay debts and are seeking a resolution.

2. Adjudicating Authority (Debt Recovery Tribunal) Takes the Case

Individuals go through Debt Recovery Tribunals (DRT). The DRT first checks whether the case is valid and may appoint a Resolution Professional to assess the financial situation.

3. Public Notice is Issued and Creditors Are Notified

A public notice is issued to all creditors, including banks or NBFCs that issued the student loan for studying abroad. They get an opportunity to file claims and oppose the bankruptcy petition.

4. Statement of Affairs and Repayment Capability is Reviewed

The Resolution Professional evaluates the borrower’s assets, income, expenses, and liabilities. If the student has no income or significant assets (and cannot reasonably repay), the RP submits a repayment plan or recommends liquidation.

5. Repayment Plan is Negotiated (If Possible)

In some cases, a repayment plan is proposed with reduced EMIs, extended tenures, or partial waivers. The lenders (student loan providers) can approve or reject it. If approved, the borrower should stick to this plan strictly.

6. Bankruptcy Order is Passed (if Resolution Fails)

If no repayment plan is accepted or feasible, the DRT can declare the individual bankrupt. A trustee is appointed to manage the borrower’s assets. At this stage, banks can still recover dues from co-borrowers or collateral.

7. Education Loan is Not Automatically Written Off

Even after bankruptcy is declared, student loans for studying abroad are not waived unless the court finds repayment impossible in good faith. If the court is satisfied, it may discharge the loan partly or fully — but this is very rare.

8. Post-Bankruptcy Compliance and Closure

If the debt is discharged, the student (borrower) should comply with all court orders. After completion of the process, a discharge certificate is issued, which legally closes the bankruptcy.

We have seen that filing for a Bankruptcy under the IBC can offer relief through restructured payments, but not a total waiver. There are also some consequences of filing a bankruptcy that can be faced by both the borrowers and the co-borrowers.

Consequences of Defaulting on Student Loans for Studying Abroad

Whether or not bankruptcy is filed, overseas education loan defaults have long-term implications:

• Damaged Credit Score: Loan defaults are reported to CIBIL and other credit bureaus, severely impacting your creditworthiness for future borrowing.

• Co-Borrower’s Credit Risk: Since overseas education loans in India usually involve a co-borrower (often parents), their credit score and financial access are equally impacted.

• Asset Seizure in Secured Loans: If the student loan for studying abroad is backed by collateral like property or fixed deposits, the lender can legally initiate repossession of those assets in India.

• International Recovery Attempts: Many Indian lenders partner with international debt recovery agencies that can pursue legal or recovery actions even if you have moved abroad..

• Visa or Immigration Complications: A poor repayment history can affect visa, PR, or immigration decisions in countries that assess financial background, such as Canada, Australia, the USA, etc.

• Lawsuits from Lenders in India: Persistent non-payment can result in formal legal notices, followed by civil lawsuits filed in Indian courts by the lending institution..

• Persistent Liability Despite Bankruptcy: Filing for bankruptcy under IBC doesn’t guarantee loan discharge; courts evaluate financial status before providing relief.

• Third-Party Recovery Intervention: After several failed attempts, banks and NBFCs may assign your case to third-party recovery agents, who may aggressively follow up or even contact your family.

• Reputational & Emotional Stress: Beyond financial damage, constant reminders, legal letters, and reputational pressure can take a toll on you and your family’s peace of mind.

A damaged credit score, asset seizure, legal action, a stained financial record — when all of this comes at once, it can hit you like a storm you didn’t see coming. That is exactly why Indian students, and their co-borrowers need to plan smart from the very beginning. Choose loan terms that actually work in your favour, think ahead about repayment, and explore part-time job options while studying, so you are not caught off guard later.

Alternatives to Bankruptcy for Student Loans for Studying Abroad for Indian Students

Declaring Bankruptcy isn’t the way out. There are smarter, safer ways Indian students can take before things spiral out of control. Let us look at the practical ways to stay afloat and keep your student loans for studying abroad from becoming a burden.

• Request Loan Restructuring or Extended Moratorium: Approach your lender to revise repayment terms or extend the moratorium period during financial hardship.

• Negotiate Lower EMIs Based on Income: Seek EMI adjustments linked to your current earnings or partial payment capabilities for manageable monthly outflow.

• Utilise Government Support Schemes like CGFEL: Apply under the Credit Guarantee Fund for Education Loans, which offers security-free loans with government backing.

• Consider Refinancing through NBFCs or Private Lenders: Shift your existing loan to institutions offering more flexible repayment options, lower interest, or top-up facilities.

• Leverage Overseas Part-Time Work and Post-Study Job Visas: Use legal part-time work during studies or full-time employment post-graduation to build repayment capacity without defaulting.

While bankruptcy may sound like a reset button, in the world of student loans for studying abroad, it is more like a risky prune — it doesn’t always fix the damage and often leaves scars. That is why it is smarter to plan early: compare overseas education loan interest rate, understand your repayment obligations, and look for options that give you breathing space.

At Élan Overseas Education Loan, expert guidance helps students not only secure the right funding but also prepare for repayment with confidence. Whether it is choosing a lender with better interest rates or understanding the fine print, having a knowledgeable partner makes all the difference.