Bankruptcy can have a ripple effect on the people around you, but what about your co-signer? Keep reading to learn more.
What is a Co-signer?
A co-signer is a family member or close relation that agrees to take full responsibility for paying off a loan if the primary borrower fails to do so. A cosign can help legitimize borrowers who are young, have no or poor credit, or may not meet income requirements for lending. Additionally, a co-signer can help the borrower get better loan rates.
Cosigning falls under joint credit which is credit shared by two borrowers. However, unlike other credit cases, a cosigned loan is not always shared equally. Instead, the co-signer is usually off the hook unless the primary borrower fails to pay the loan amount.
Co-signers can be relatives, spouses, guardians, or friends. The most common example of a co-signer relationship is a parent signing for an apartment lease for their child. In these cases, the parent agrees to pay rent and any financial penalties that occur due to late or missing payments.
It is important to recognize that failure to pay in the primary borrower’s stead can negatively affect the co-singer’s credit score. Once a co-signed loan is approved, the borrower and co-signer are locked in a financial contract with the lender and must follow the loan terms and conditions.
Bankruptcy is a legal process whereby an individual files for debt relief. There are two types of bankruptcy for individuals including Chapter 13 and Chapter 7. Chapter 13, also known as reorganization, allows the debtor to reorganize their debts into a payment plan that will result in full repayment within three or five years. Chapter 7, or liquidation, gives the court power to assign a trustee who will liquidate nonexempt assets to create funds dedicated to repaying the debt.
Once a person files for bankruptcy, the court issues an automatic stay which is a court order that stops any and all collection attempts from creditors. Additionally, while bankruptcy is a reasonable debt relief method, it does negatively affect credit scores. The amount to which a bankruptcy filing impacts a credit score depends on the debtor’s circumstances, but at worst, a filing can reduce a credit score by 200 points or more.
So, what happens when the debtor and the co-signer cannot pay? Are co-signers at risk if the primary borrower files for bankruptcy?
Because co-signers are on the hook for debt the borrower cannot pay, creditors are taking their rights to attempt to collect the missing payment from the co-signer. Additionally, filing for bankruptcy does not necessarily protect the co-signer, but it also may not hurt them in some cases.
Depending on the type of bankruptcy filed, a co-signer could be approached by creditors looking for the debt. Chapter 7 is harsher on the borrower and co-signer. In general, Chapter 7 does not extend an automatic stay to the co-signer which means debt collectors can pursue the co-signer while the debtor is in bankruptcy proceedings. Unless the borrower reaffirms the debt or repays the debt in full, co signers could face aggressive creditors.
Chapter 13 on the other hand, is less intense for the debtor and co-signer. Under Chapter 13, co-signers benefit from an automatic stay which means creditors may not pursue repayment by contact the co-signer. However, while Chapter 7 may discharge debt, Chapter 13 requires full repayment. This means that if the borrower does not indicate that their reorganization plan will result in payment of all debts in full, creditors could attempt to collect even after the bankruptcy case is over.
Co-signers are neither wholly responsible for bankruptcy nor absolved. They maintain some share of responsibility which varies depending on the type of bankruptcy filing.
Co-signers may be held responsible for debt during bankruptcy and could face collections entities after the case is over. The best way to protect yourself and your co-signer is by contact a qualified attorney. Law Office of Seni Popat, P.C. has extensive experience with complex bankruptcy cases from filing to resolution. When you choose our firm, you work with our lead attorney who attends to each case personally. Our team is easily accessible and always available to answer your questions and address concerns.