Filing Bankruptcy With Cosigners

We all need help from time to time, whether it’s help with moving, babysitting, or securing a loan for a large purchase. If you take on a debt with a cosigner, it’s important for both of you to understand the terms of the loan and what could happen if you’re unable to keep up with your payments. If you’re filing bankruptcy, your cosigners should be informed, because they may be financially affected.

How Cosigners Work

If you’re just starting out or have a low credit score, you may qualify for a loan on your own. Instead, you may need to have a cosigner who will be responsible for the debt if, for some reason, you were unable to make the payments. Bankruptcy can discharge debts in your name, but it may leave your cosigner with the responsibility. As soon as you file, the automatic stay goes into effect, so you are no longer required to make payments on unsecured debt, and your creditors may no longer attempt to collect your debts. However, your cosigners may not be off the hook.

Chapter 7

You’re pretty much guaranteed that your creditors will contact your cosigners to start collecting what you owe if you file a Chapter 7. But there are some things you can to do take this burden off of them. Knowing that your unsecured debts will be discharged, look at your budget to see if you can keep up with your secured debts with cosigners once the other debts are gone. If you can, you may choose to reaffirm the debt and put it in your name only before filing. You and your cosigner may also agree that you’ll go ahead with the Chapter 7, but will make the secured payments on their behalf. These may be the only ways to keep peace in the relationship.

Chapter 13

If you’ve chosen to file a Chapter 13, your cosigners may not be affected at all. Your secured debts with cosigners will be included in your 3-5 year repayment plan and will be considered up to date. Your co debtor would be part of a
“co debtor stay,” similar to the automatic stay. If you start to fall behind on your payments, your creditor could ask the court to lift the stay, which means your cosigner would be responsible for payments. Also, if you decide to convert to a Chapter 7 or if your case is dismissed at any point, the co debtor stay would end, and your creditor would contact your cosigner to begin making payments.

Communication is Key

Even the closest of friends and tightest of family members can be strained if a loan cosigning situation goes sideways. Be sure to have open communication before taking out a loan together so that you’re both on the same page. If it looks like you’re not going to be able to make your loan payments and you’re considering bankruptcy, call me right away. We’ll come up with a plan to take care of your financial responsibilities while preserving your important relationships.