how does bankruptcy affect a cosigner

How Does Bankruptcy Affect A Cosigner?

In this article, we’ll be tacking the question: “How Does Bankruptcy Affect A Cosigner?”

Most certainly, the cosigner of your debt is also going to be affected when you file a bankruptcy case. When there is any default in loan repayment, the creditors have every right to charge the cosigner. However, there are multiple ways to protect your cosigners from the creditors.

This article will discuss how a consigner is involved in bankruptcy and how you can protect them from getting chased by creditors. 

How does bankruptcy affect a cosigner?

A cosigner, in simple words, is a guarantor for your loan. When you sign a loan form along with the consigner, they are equally responsible for the debt repayment. It is a much severe responsibility than it sounds. Once the consigner agrees to the terms and conditions of the loan and signs the documents, they are also legally bound to the contract. 

If you are someone trying to set up a business or do not have a perfect credit score, it is often difficult to collect funds. In such cases, the creditor will advise you to get someone who has a better credit history and can be considered a guarantor on your behalf.

A cosigner who has a better income source, valuable assets are often preferred by the creditor, as there are fewer chances of loan repayment default. In a few cases, the bank may ask you to find a consigner if you have already filed a lawsuit of bankruptcy previously, or you wish to take a more massive amount of loan than your income, or you do not have a good credit history. 

So, when you are unable to repay the loan or debt, it automatically jumps to your cosigner as now it is their responsibility to repay the loan. Let’s find out the types of Bankruptcy cases, and how is the cosigner impacted?  

How is a cosigner affected in different cases of bankruptcy?

There are two types of bankruptcy that we have discussed below.

1. Chapter 7 

If you have decided to file a bankruptcy case under Chapter 7 of the Federal law, there is an immediate stay order on all kinds of debt collection activities from the creditors. However, that is not covered for the cosigners or guarantors. They are subjected to debt collection and persuasion. However, there are ways in which you can stop that from happening. 

Firstly, you can straightaway pay off the debt yourself. After you have been discharged from the debts, you don’t need to pay your creditors. But if you wish, you can pay off the loan voluntarily.

The cosigner, on the other hand, can pay off monthly instalments on your behalf. However, the guarantor will have to pay a lump sum amount to pay off the entire debt. You can always negotiate with the creditor on a preferable repayment plan. It is unlikely that the creditor will agree if you have a consigner or guarantor with acceptable assets. 

Secondly, you can reaffirm the secured loans, including car loans, jewelry, a computer in which the debtor will have to give up if he is unable to repay the loan. But by doing so, you will be subjected to the obligation by yourself, and protect your cosigner or guarantor

2. Chapter 13

Unlike in Chapter 7, the consigners and guarantors are well protected if you file a bankruptcy case under Chapter 13. There is an automatic stay on debt collection on both the debtor and cosigner/guarantor. There is also a provision to pay off the debt through a repayment plan over 3-5 years. However, the creditor can request the court to remove the automatic stay under a few circumstances- 

  • If the creditor will undergo huge losses if the stay is not removed
  • If the debtor is promising to pay only a certain amount and not the entire amount through the repayment plan
  • If the cosigner has taken benefits of the loan

The consigner’s stay will end if the court decides to convert the case into Chapter 7 from Chapter 13 or even decides to dismiss. 

Filing bankruptcy on student loans with a cosigner

When you are a student, it is often hard to pay off your loan under challenging circumstances. In such cases, you can file a discharge of the student loan petition. In case you have explored all instances to repay, you can explore filing a lawsuit of bankruptcy under Chapter 7 or Chapter 13. 

After the student has finished college and cannot find a decent job to repay the debt, the consigner will be facing trouble. When the student files for bankruptcy, even though the debtor is relieved of the loan, the creditor is still under the lens to pay off the debt.

Final Thoughts

When a debtor takes a loan, and carefully chooses the cosigner, make sure the cosigner is ready to face any legal action in case of any defaults. There are risks involved, and the consigner should face it and then decide on signing the documents. 

Video      

Here is a video demonstrating the scenarios of cosigners in bankruptcy. If you need more information on “How Does Bankruptcy Affect A Cosigner” watch this short video below:

Discolsure: I am not a financial expert and it is highly recommended that you seek out a professional before making any financial decisions. Articles are informational and for educational purposes only.

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