How will my cosigner be affected when I file bankruptcy?
It is not unusual in these times for a person to have a few dings on their credit. Such dings commonly happen when someone is late making payments for credit cards, utilities, or mortgage or rent payments. When someone who has less than a stellar credit score wants to get a loan to purchase a car or a home, they may find that because of those credit dings they are either charged an exorbitantly high interest rate or cannot get a loan at all. That is where a cosigner comes in.
What happens if the original person who got the loan files for bankruptcy? Or if the original person stops making payments and the lender takes a charge-off on the money owed? Read on to learn the answers to these questions.
What is a cosigner?
A cosigner may be a friend or family member who has a good credit score and is willing to sign on a loan with the person who does not have a good credit score. This second person, the cosigner, is in essence lending use of his good credit history to the original person who wants the loan.
Having the cosigner on the loan gives additional assurance to the lender that should the original borrower default on the loan the cosigner can pick up the payments.
What happens to the cosigner if you declare bankruptcy?
If you file for bankruptcy, the affect on the cosigner depends on whether you file Chapter 7 or Chapter 13 bankruptcy.
Cosigners and Chapter 7 Bankruptcy
If you file a Chapter 7 bankruptcy, the bankruptcy will completely eliminate most of your debts. Or rather, in the case of a loan with a cosigner, the bankruptcy will eliminate the burden of repaying the debt from the person who files the bankruptcy.
But the debt will still exist and the lender will still seek payment of the loan from the cosigner. The cosigner on the debt will still be responsible for paying the debt and you can expect the lender will pursue the cosigner to make good on taking over the payments.
Cosigners and Chapter 13 Bankruptcy
If you file a Chapter 13 bankruptcy, the bankruptcy will reorganize rather your debts into a payment plan you can afford. So long as the person who filed bankruptcy continues to make payments on the debt according to the court arranged payment agreement, the lender will not have need to pursue the cosigner for payment.
However, should you default on making payments according to the Chapter 13 repayment plan, the lender will then be able to seek repayment of the loan from the cosigner.
In summary, whether you file Chapter 7 or Chapter 13 bankruptcy, the cosigner’s commitment on the loan will stay intact and give the lender legal authority to seek repayment of the loan from the cosigner should it become necessary.
What happens if I stop making payments on the loan and the lender charges off the debt?
A charge-off is simply an accounting adjustment on the lenders books so they have lower accounts receivable. A charge-off is not a release of the obligation the original borrower or the cosigner has to repay the money owed to the lender. Even if the lender charges off a loan, the lender still has the right to pursue the original borrower and the cosigner for repayment.
If the original borrower stops making payments to the lender and the cosigner likewise does not pick up making the payments, the lender will likely report the delinquency on the credit reports of both the original borrower and the cosigner.
If the cosigner starts making the payments, generally the lender will be content and have no reason to pursue the original borrower for repayment. But should the cosigner stop making the payments, the lender would still have authority to pursue either or both parties for the money.
How can I get help if I am considering filing bankruptcy?
Filing bankruptcy is not something that should be done lightly, as having a bankruptcy on your credit report will affect your ability to get a loan for many years.
Therefore, before you file for bankruptcy, you should speak with a bankruptcy attorney who is familiar with the bankruptcy laws of your state. A bankruptcy attorney is a trained professional who can advise you on the best way to deal with your specific situation. And anything you tell the bankruptcy attorney is completely confidential.