If you used a co-signer to secure a mortgage, lease, car loan, or student loan, then you’re right to have some concerns over how bankruptcy will impact them. While it is possible to get through the entire bankruptcy process without hurting your cosigner at all, there are moves you can make to their detriment.
Understand: a co-signer isn’t just providing a reference. They’re making a promise to pay back the loan if you can’t. And that has some serious implications if you let the debt go delinquent, or file bankruptcy.
Delinquent Debt vs. Bankruptcy
In the short term, filing bankruptcy is going to work in your co-signer’s favor. This is especially true if you file bankruptcy before the debt goes delinquent.
There are two reasons for this.
First, creditors or collection agencies don’t always call co-signers right away. Your co-signer may have absolutely no idea you’re not paying the bill. But the delinquency gets reported on their credit report, month after month.
If you’re too ashamed to talk to them about it, you could lower their credit score by a significant margin, robbing them of the very good credit that let them sign for you in the first place.
Second, if the creditor decides to sue they will go after your co-signer first. Your co-signer, after all, is the one with the money and resources. They were counting on those very resources when they issued the loan.
Filing bankruptcy is the only sure way to protect the co-signer from legal action.
And while the case is in progress, the co-signer gets protected by the automatic stay just as you do. Creditors won’t be able to take this protection away from your co-signer unless they take some specific legal steps.
Chapter 7 vs. Chapter 13
Filing Chapter 13 is usually the best way to protect your co-signer.
That’s because you pay the debt during a Chapter 13 plan. And as long as you include the co-signed debt in the repayment plan and keep up with your payments your co-signer will be protected for the entire 2-5 years, just as if you’d never had trouble paying the debts in the first place.
If there’s any balance left over on the debt after you complete your plan you might want to pay it off. Creditors can go after co-signers for the deficiency.
In some cases, you may be able to pursue and complete a co-signer release form before the plan’s scheduled end date.
If you file Chapter 7 you could cause your co-signers some problems. The trustee will sell your assets, like your home or your car, to the highest bidder. Since these secured loans are the ones your co-signer was most likely to be involved in then you can bet this maneuver has the potential to cause problems for your friend or family member.
Because the amount the property sells for is likely to be far less than the amount you owe. And the creditor can go after your co-signer for the balance. At that point, your only recourse would be to reaffirm the debt and begin making payments on it again.
For Best Results, Seek Guidance
Co-signers are complications requiring solid legal guidance. Make sure you go into the bankruptcy process with an experienced attorney by your side.
With the right strategies, we can make bankruptcy work for you, and for your co-signer.