The Impact of Bankruptcy on Co-Signers

What Is a Co-Signer?

A co-signer is someone who agrees to take on the legal responsibility for a loan or credit agreement alongside the primary borrower. By co-signing, they guarantee the debt will be repaid, even if the borrower is unable or unwilling to make payments. Essentially, the co-signer acts as a financial back-up for the lender, reducing the lender’s risk.

Co-signers are often used in situations where the borrower has a low credit score, insufficient credit history, or limited income. By adding a co-signer with stronger financial credentials, the borrower may qualify for the loan or secure better terms, such as a lower interest rate.

Key Features of a Co-Signer Relationship:

1. Shared Liability: Co-signers are equally responsible for the debt. If the primary borrower defaults, the lender can pursue the co-signer for the remaining balance.
2. Credit Impact: The co-signed loan will appear on both the borrower’s and co-signer’s credit reports. Timely payments can improve the credit scores of both parties, while missed payments or defaults can negatively affect the co-signer’s credit.
3. No Ownership Rights: Co-signers are financially liable for the loan but typically have no ownership rights to the asset or funds involved. For example, a co-signer on a car loan is responsible for repayment but does not own the vehicle.

While co-signing can help borrowers access credit, it comes with significant risks for the co-signer. If the borrower files for bankruptcy or fails to repay the loan, the co-signer may be left to cover the entire debt, potentially leading to financial hardship. Understanding these risks is essential before agreeing to co-sign any loan.

Effects of Bankruptcy on a Co-signer

The effect of bankruptcy on a co-signer depends on several factors, including the type of bankruptcy you file, the type of debt involved, and any applicable legal protections. Here’s a closer look.

1. Chapter 7 Bankruptcy

When you file for Chapter 7 bankruptcy, most of your unsecured debts, including personal loans, are discharged. While this clears your obligation to repay the loan, it does not eliminate the co-signer’s liability. The lender can still pursue the co-signer for the full amount of the loan, as the co-signer’s legal obligation to repay is independent of your bankruptcy.

For example, if you include a $10,000 personal loan in your Chapter 7 filing, you are no longer responsible for the debt after discharge. However, the lender can demand repayment from the co-signer, who remains fully liable for the balance.

2. Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, you propose a repayment plan to pay off a portion of your debts over three to five years. This type of bankruptcy provides additional protections for co-signers through what’s known as the co-debtor stay.

The co-debtor stay temporarily prevents creditors from pursuing co-signers for repayment while you are making payments under your Chapter 13 plan. However, this protection has limitations:

• If the co-signer benefited from the loan (e.g., the funds were used for a joint purchase), the co-debtor stay may not apply.
• If your Chapter 13 plan does not fully repay the personal loan, the co-signer may still be held liable for any remaining balance after the plan concludes.

Exceptions and Limitations

While bankruptcy offers relief for debtors, it does not automatically eliminate the co-signer’s obligations. Here are some key points to consider:

1. Discharge Only Applies to the Filing Debtor: Your bankruptcy discharge applies solely to you, not to your co-signer. Unless your co-signer files for bankruptcy as well, they remain fully liable for the debt.
2. Creditor Actions Against Co-Signers: Creditors can continue to pursue co-signers for repayment after your discharge in Chapter 7 or once the co-debtor stay is lifted in Chapter 13. This may include collection efforts, lawsuits, or wage garnishment.
3. Impact on Co-Signer’s Credit: If you default on the loan or include it in bankruptcy, it can negatively affect the co-signer’s credit score. Missed payments, defaults, or collections will appear on their credit report, potentially lowering their creditworthiness.

Protecting Your Co-Signer During Bankruptcy

If you’re filing for bankruptcy and want to minimize the impact on your co-signer, consider these strategies:

1. Include the Loan in a Chapter 13 Plan

Filing for Chapter 13 bankruptcy can help protect your co-signer by allowing you to include the personal loan in your repayment plan. As long as you make the agreed-upon payments, the creditor cannot pursue your co-signer. If the loan is fully repaid through the plan, your co-signer is released from liability.

2. Negotiate with Creditors

Before filing for bankruptcy, consider negotiating directly with the lender to restructure the loan or reach a settlement. This may reduce the amount owed and protect your co-signer from being pursued for the full balance.

3. Pay Off the Loan Before Filing

If possible, paying off the co-signed loan before filing for bankruptcy can eliminate the risk to your co-signer. However, consult with a bankruptcy attorney before making payments, as certain transactions before filing may be scrutinized by the court.

4. Reaffirm the Debt

In some cases, you may choose to reaffirm the co-signed loan during bankruptcy. This means you agree to continue repaying the debt even after the bankruptcy discharge. While this can protect your co-signer, it also means you remain legally obligated to the lender, so consider this option carefully.

5. Communicate with Your Co-Signer

Transparency is key. Let your co-signer know about your financial situation and your intention to file for bankruptcy. Working together can help you both plan for the potential consequences and explore options to protect their financial health.

Should You File Bankruptcy with a Co-Signer?

Filing for bankruptcy when you have a co-signed loan requires careful consideration. While bankruptcy can provide relief for you, it can place a significant burden on your co-signer. Consulting with an experienced Los Angeles personal debt settlement lawyer can help you evaluate your options, understand the potential impact on your co-signer, and develop a strategy to minimize the consequences.

Contact Wadhwani & Shanfeld

When you file for bankruptcy, your co-signer’s financial liability does not automatically disappear. While Chapter 13 bankruptcy provides some temporary protections, creditors can still pursue co-signers for repayment in many cases. By understanding how bankruptcy affects co-signed loans and taking proactive steps to protect your co-signer, you can navigate the process more effectively.

If you’re considering bankruptcy and are concerned about the impact on your co-signer, contact Wadhwani & Shanfeld today. Our experienced bankruptcy attorneys can guide you through the process, help you protect your co-signer, and develop a plan for achieving financial relief. Schedule a consultation to discuss your options and take the first step toward a brighter financial future.

Source:

thebankruptcysite.org/resources/bankruptcy/chapter-7/cosigner.htm