What Happens to Your Cosigners When You File Bankruptcy?

A cosigner is someone who signs his or her name along with the primary borrower on lending papers and takes on responsibility for payment of that debt should the primary borrow default.

In most cases, a cosigner has stronger credit than the primary borrower and can help that person get better loan terms, like lower interest rates and monthly payments.

Cosigners can be helpful for:

  • Young adults: Often, a parent (whose credit is better established) will cosign a loan for an adult child to help him or her get more affordable terms.
  • Those recovering from bankruptcy: After filing for bankruptcy, you may need someone with stronger credit to cosign a loan with you in order to get reasonable terms.

What happens to cosigners when you file for bankruptcy?

  • In Chapter 7 bankruptcy, many debts are completely forgiven (discharged). This would mean that the burden of payment is removed from you – BUT your cosigner (or “co-debtor”) is still responsible for making payments.
  • In Chapter 13 bankruptcy, payments are made according to the terms of a repayment plan. In this case, as long as you keep up with your payment schedule, your cosigners are protected and not responsible for paying that debt.

Other Cosigner & Bankruptcy Considerations

  1. Remember: before you're filing bankruptcy, any payment you miss or make late will harm both your credit and your cosigner’s credit.
  2. Cosigners for business loans are not protected at all by bankruptcy filings.
  3. When deciding which chapter of personal bankruptcy to file, you need to choose the one that will work best for your finances. Although your cosigners could be negatively affected by your decision, they did take on considerable legal responsibility and personal risk by signing the legal documents.

Friend & Family Cosigners & Your Bankruptcy

In many cases, cosigners are close friends or relations. Filing for bankruptcy has the potential to strain these relationships, so it’s important that you take steps to make sure bankruptcy is the right choice for you and the best way to get you back on your feet financially.

Speaking with a bankruptcy lawyer may be a wise first step.

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This entry was posted on Monday, March 16th, 2009 at 5:31 pm and is filed under Filing Requirements, Finance 101: Secure Your Future, Your Credit Score. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

One Response to “What Happens to Your Cosigners When You File Bankruptcy?”

  1. Becky says:

    I had a question for anyone.
    I loaned my sister and my brother in law $2000.00 and have a contract that states that. They have not paid me anything back. They are thinking about filing for bankruptcy. My question to you is what happens to the money that I loaned them? Im going to school and have bills of my own. they have already missed every deadline about paying me back. Do i have a leg to stand on if i take them to small claims court to get it back and they already have filed? Do i eat the money? Thank you for your time