What Happens if My Cosigner Files for Bankruptcy?

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What Happens if My Cosigner Files for Bankruptcy?

What happens if my cosigner files for bankruptcy

When you’re feeling insecure, filing for bankruptcy is a significant and stressful time. If one of your cosigners or guarantors decides to file for bankruptcy, this can contribute to more complications. You can get your financial life back on track with the proper knowledge and support team. Here’s what you need to know about cosigning and what happens if they file for bankruptcy.

What is a Cosigner?

A cosigner is an individual who agrees to be legally bound to a loan if the primary borrower can’t pay its costs. Lenders typically require a cosigner for first-time borrowers, especially if the borrower has no or poor credit history. 

The cosigner needs to be an individual with a reliable source of income, improved credit, and higher assets. Cosigners aren’t just restricted to loans – they may be required for first-time renters or for leasing other items like vehicles.

Even so, being a cosigner comes with risks. As well-intentioned as the initial prospect may be, you could run into a sticky situation if they, too, are experiencing financial insecurity. The consequences will significantly depend on the actions of the cosigner, particularly if they file for bankruptcy.

What Happens to My Co-Borrowed Debt Following Bankruptcy?

Once filing for bankruptcy is completed, the remaining unsecured debts will be discharged. Meaning you are no longer required to repay these fees. The bankruptcy itself will also apply to your cosigner, but this excludes the discharge, an essential detail that a cosigner will need to understand ahead of time.

However, once a borrower files for bankruptcy, creditors will ensure the entire loan is due to get a collection on the account. Unfortunately, during this time, the borrower’s account is entirely frozen. Ultimately, this will affect their ability to make any payments or leave a mark on their credit report due to bankruptcy.

How this trickles down to the cosigner dramatically depends on the type of bankruptcy filed. The two most common forms of bankruptcy are chapters 7 and 13. These come with particular requirements, and their steps can vary by state.

Cosigners and Guarantors

Cosigners and guarantors are often used interchangeably, but they serve slightly different purposes. Cosigners are usually equally responsible for every payment related to the loan. Guarantors are only responsible for the loan if the borrower doesn’t fulfill payment obligations.

In other words, creditors must try to collect from the primary borrower before resorting to the guarantor. The opposite is valid for a co-signer. The guarantor will also ensure the lender pays off the loan if the borrower cannot.

A cosigner can assist the borrower by financially covering monthly payments. However, a guarantor will be responsible for the entire balance. Even so, either of these roles’ responsibilities can differ depending on the type of bankruptcy filed. As similar as they may appear, it’s essential to understand their differences since that is what will be the determining factor of who’s making up the payments.

Chapter 7

If you file for chapter 7 bankruptcy, you’ll be relieved of any financial obligations. However, this will not extend to your cosigner or guarantor because your creditors are permitted to collect the debt. Even though they’ll be entirely responsible for making sure these payments are made, there are steps you can take to protect cosigners and guarantors from chapter 7 collection efforts.

Missed payments contribute to negative credit scores, foreclosure, repossession, and lawsuits. The co-borrower may take over the loan, which should notify them so payment does not default. Whether a cosigner or original borrower, you should always keep records of your loans for these situations.

Even so, if the cosigner continues to submit their payments on time, they won’t be affected by bankruptcy. The original borrower will be listed as a “surrendered” asset on the bankrupting schedules, where the cosigner will solely take over the loan.

Reaffirm or Pay Off the Debt

Before getting a discharge in chapter 7, you can reaffirm your secured debts. It means you won’t be able to discharge the debt.

You may also choose to pay off your debts voluntarily, even if the bankruptcy has already relieved you of any financial obligations. You can continue doing this until the debt is fully paid off, taking all pressure off your cosigners and guarantors. However, it should also be mentioned that you may need to negotiate with the creditor in this scenario. They may not agree to this decision if the guarantor can fully pay the debt.

Chapter 13

Filing bankruptcy under chapter 13 includes a different process. Generally speaking, chapter 13 is more likely to protect your cosigners and guarantors. It also gives you more time to pay off your debt in a 3-5 year plan. Once chapter 13 is filed, an automatic stay is put in place that protects cosigners and guarantors from creditors attempting to collect consumer debts.

This is known as the chapter 13 codebtor stay. Keep in mind that the creditors may still ask the courts to lift the automatic stay under the following circumstances:

  • You don’t plan to pay off the entire debt by the end of your chapter 13 plan
  • Your cosigner or guarantor received the majority of the benefits from the deal
  • The creditor is at an elevated risk if the stay remains in place

If the court dismisses your case, the codebtor stay will end if it’s converted to a chapter 7 policy. In other words, under chapter 13, your bankruptcy won’t affect your cosigner or guarantor so long as you continually follow through with payments.

What Happens When My Cosigner Files for Bankruptcy?

Just like your cosigner or guarantor will be affected if you file for bankruptcy, the same is true the other way around. Even if you’re caught up on payments, a cosigner’s bankruptcy may place you into default, particularly in the case of student loans. In other words, if the cosigner cannot pay off the debt, the balance will be due immediately.

Regardless of your payment history, this can significantly affect your credit score. When you default, you must pay the entire loan upfront or face a collection of action. If your guarantor is filing for bankruptcy, it’s best to have them completely removed from the loan account. In the case of a cosigner, you’ll be responsible for paying off the whole loan.

This happens because lenders rarely remove cosigners from accounts. Your credit score will be negatively affected if you don’t make the payments on time.

Protecting Your Credit Score

Regardless of what happens, once you know your cosigner or guarantor is filing for bankruptcy, keep a close eye on your credit report. If you’ve been paying off your loans on time and get stuck in a sticky situation when your cosigners file for bankruptcy, you might be able to file a dispute with a credit rating agency.

Suppose you notice your credit score being negatively affected by the bankruptcy, file a dispute with a credit bureau for removal. Since you didn’t file a bankruptcy, it shouldn’t need to be your credit report. Even so, a lender blocking payments may report defaults every time they update a credit bureau. If this continues happening, you may need to bring in extra support to protect your cred score.

Work With a Bankruptcy Lawyer

If you or your cosigner are planning to file for bankruptcy, more than disputing your credit score may be needed to improve things. If you’re overwhelmed by the process, work with an experienced bankruptcy attorney to defend your case!

More specifically, Sadek Bankruptcy Law Offices’s law offices based in Philadelphia are more than ready to take on your case! We have a team of professional and highly compassionate attorneys that will work with you to get you out of debt. Contact us to schedule a consultation with us today!

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