If you’re considering co-signing a loan for a friend or family member, or you have a loan with a co-signer, it’s important to understand the implications, especially if you or the primary borrower is considering bankruptcy. Co-signed loans are handled differently than individual loans in bankruptcy.
The most important thing to realize as a co-signer is that your credit can be negatively impacted if the person for whom you have co-signed files for bankruptcy. And if you are filing for bankruptcy, anyone who has co-signed for you will be affected when you file.
Specifically, a loan with a co-signer that is discharged in a bankruptcy filing might still be the responsibility of the co-signer to pay. You might be off the hook when you file, but your co-signer could still be pursued by the lender.
Co-signing for a loan makes a person legally responsible for a debt. It doesn’t matter what is discussed between the primary person borrower and the co-signer, nor does it matter what the financial situation is for either party. No matter the private arrangement, the lender will do all it can to pursue payment and usually this means trying to collect from the co-signer when the primary borrower is unable to pay.
Furthermore, lenders and creditors report the debt to the credit bureau for both the primary borrower and the co-signer. If you are considering co-signing for a loan, you should view yourself as a co-debtor because you will be held equally responsible for the debt.
To learn more about how co-signing for a loan can affect your credit, read this information from FreeCreditScore.com and Experian.
Having a co-signer won’t affect your ability to file for Chapter 7 bankruptcy. The co-signer’s income won’t factor into your bankruptcy and their ability to repay the co-signed loan won’t make you ineligible to file. The debt will still be discharged in your bankruptcy and the creditor will no longer be able to pursue you for repayment. It can, however, pursue the co-signer. Your bankruptcy provides no protection to the co-signer of the discharged debt.
You can estimate whether you qualify for a Chapter 7 bankruptcy using the free means test calculator below.
Chapter 13 bankruptcy does provide a bit of protection to co-signers of a loan listed in the bankruptcy. This is because Chapter 13 is a structured repayment plan, so creditors do receive payments toward the debt. Creditors cannot pursue collections in full on a debt that is current in a Chapter 13 plan. However, if the debtor defaults on his or her Chapter 13 repayment plan, the co-signer can be held responsible for the debt.
It’s common for people considering bankruptcy to have co-signed loans. Sometimes people who eventually file for bankruptcy had little credit to begin with and needed co-signers or they were struggling financially when they accepted the co-signed loan. Unfortunately, everyone can end up losing out if bankruptcy eventually becomes necessary, even if the intentions were originally good.
If you are considering bankruptcy or you have co-signed a loan for someone who is considering bankruptcy and you have questions, we can help. Contact the Bankruptcy Law Office of Robert M. Geller at (813) 254-5696 to schedule a free bankruptcy lawyer consultation.
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