How Does Bankruptcy Impact Co-Signers On A Loan?
Filing for Chapter 7 or Chapter 13 bankruptcy is a great way for someone to find financial relief if they have a large amount of debt. People often don’t think about how filing for bankruptcy will affect a co-signer. It is crucial to understand how bankruptcy will affect you and the person who helped you secure any of your loans before making any decisions.
Co-Signing A Loan And Your Financial Liability
A co-signer is someone who agrees to share the responsibility of repaying a loan with the primary borrower. This means that they will be responsible for making payments if the primary borrower has failed to do so. A co-signer is typically used when a person has limited credit history, low income, or a lower credit score. The co-signer may not need or use the loan, but they are obligated to help repay the balance with the primary borrower. When payments are missed, the lender can go directly to the co-signer to seek payments. If payments are not made the primary borrower and co-signers’ credit scores will be affected.
How Does Bankruptcy Affect A Co-Signer?
When a person files for bankruptcy, they will disclose any debts they have. Depending on the type of debt and the type of bankruptcy filed, the debtor may have some debts that will be discharged and some debts that will still need to be repaid. If the debtor has any debt discharged, the co-signer can still be held liable and responsible for repaying that debt in full. Below, we have broken down both Chapter 7 and Chapter 13 bankruptcy, how different types of debts are treated in each case, and how the entire process can affect the primary borrower and their co-signer.
Chapter 7 Bankruptcy
When primary borrowers file for Chapter 7 bankruptcy, all debts are accounted for, an automatic stay goes into effect, and the court decides which debts are dischargeable and which will need to be repaid. It is essential to recognize that there are various types of debt, and not all debts can be discharged.
Secured Debt
Secured debts must still be paid regardless of filing for bankruptcy. Things like car loans and mortgages are two examples of secured debt. If you want to keep either, you will need to continue making payments and get caught up on your debt. If you do not do this, the lender can repossess or foreclose. Regardless of filing for Chapter 7 bankruptcy, it is expected that the primary borrower will make these payments to avoid any issues. If the primary borrower chooses to surrender the home or car, the lender can repossess it. Once the lender repossesses the home or car, they will sell it, and the money made will go towards the repayment amount. Any remaining balance is typically discharged for the borrower, but the cosigner may still be liable for payment.
Non-Dischargeable Debts
Non-dischargeable debts include academic debt, child support, and tax debt. Like secured debts, this type of debt must still be paid regardless of filing for bankruptcy. The difference between non-dischargeable debts and secured debts is that both parties will continue to be responsible for paying back the debt.
Chapter 13 Bankruptcy
When primary borrowers file for Chapter 13 bankruptcy, they and the co-signer will be given a court-approved repayment plan. Chapter 13 offers some protection to the co-signer through a provision known as the co-debtor stay. This stay will temporarily prevent lenders from seeking repayment from the co-signer while there is an active repayment plan. If the primary borrower fails to make payments to the repayment plan, the co-signer will no longer be protected, and the creditors can resume seeking payment and will go to the co-signer.
How Bankruptcy Impacts Credit Scores
When primary borrowers apply for bankruptcy, the bankruptcy will only show up on their credit report. The only things that will appear on the co-signer’s credit report are missed payments and, if any debts went to collections. These things can still cause significant damage to a co-signer’s credit score. This will make it harder for the co-signer to qualify for borrowing money or getting lower interest rates in the future.
Can Co-Signers Be Removed From Loans?
In most cases, a co-signer cannot be released from a loan. One of the only ways co-signers can be removed is if the loan recipient refinances and the lender approves the removal. If you co-sign a loan, you are committing to the legal responsibility of making sure it gets repaid. Creditors and lenders are relying on you to uphold that commitment if the loan recipient fails to do so.
What Happens If A Co-Signer Applies For Bankruptcy?
Co-signers can file for bankruptcy and include anything they have co-signed. Depending on the type of bankruptcy that was filed and the type of debt submitted, the court can discharge or restructure the cosigner’s responsibility. If it is discharged from the co-signer, the account holder will be solely responsible for repaying the debt. It will no longer be the co-signer’s obligation to be responsible for repayment.
How A Bankruptcy Attorney Can Help Protect All Parties Involved
Filing for bankruptcy can be confusing, and it is important to understand all the nuances involved before making any decisions. Whether you are an account holder or a co-signer, having a bankruptcy attorney explain your obligations and help you navigate the options you have can reduce the financial strain for both parties. The bankruptcy attorneys at Jump Legal can help protect the credit scores and the personal relationships involved. Our team can show you all the options available so you can make an informed decision and not have any surprises.
Call Jump Legal Today For A Consultation
If you are looking to apply for Chapter 7 or Chapter 9 bankruptcy and are in need of help, call Jump Legal today. We will help you face your challenges and help you understand your rights and obligations before you make any decisions. Our experienced team will help guide you and show you how all the parties involved will be impacted. Contact Jump Legal today to learn more about what options you have to find financial freedom.
Contact Jump Legal Group
Columbus, Ohio 43215
Phone: (614) 481-4480 | Fax: (614) 696-6481
