What Happens to Cosigners When You File For Bankruptcy?

Whether you are the cosigner of debts, or a debtor intending to file for bankruptcy protection, know that a bankruptcy filing ultimately affects both parties. Discharging obligations in bankruptcy can put your cosigner right on the hook with your creditors. Those considering bankruptcy or co-signing on someone else's obligation need to be aware of the possible consequences to both of them.

How a Cosigner Affects Debt

When a cosigner signs a contract to help out a family member or friend, the cosigning individual becomes legally liable for that debt. In the eyes of the lender or creditor, this cosigner is a "co-debtor" according to the bankruptcy court laws. Lenders and creditors will also report these accounts for both the original debtor and cosigner. Aside from cosigner actually signing the paperwork, he or she is rarely involved unless a problem arises; such as when the debtor defaults or files for bankruptcy.

Consider Cosigners When Making a Bankruptcy Decision

Since cosigners are considered codebtors by bankruptcy law, lenders and creditors can legally pursue your cosigners. Cosigners cannot affect your ability to file for bankruptcy, but your bankruptcy will affect them in many ways. Since they are legally responsible for your debts, creditors and lenders will turn to the cosigners for repayment of these debts. Before filing your bankruptcy, respect your cosigners and at least inform them about your possible bankruptcy.

Different Bankruptcy Filings Effect Cosigners Differently

In a Chapter 7 bankruptcy filing, eligible debts are discharged and the debtor is protected from creditors by the bankruptcy filing. Unfortunately, cosigners have little recourse as they are not protected by the debtor's bankruptcy in this case. Without this protection, creditors can still demand that the cosigner to pay off your existing debts. In addition, any further delinquencies and collections may turn up on the cosigner's credit history.

In a Chapter 13 bankruptcy filing, debtors arrange for a reorganization of debt under a structured repayment plan. Under this filing of bankruptcy, cosigners are protected as long as the Chapter 13 filing is active. If for example, the debtor defaults on these agreed repayment plans, the cosigner will again be held responsible for the remaining debts.

Those who are considering bankruptcy will often have cosigners on their loans, as many might have had trouble qualifying for credit on their own. Before deciding to file, it's important to consider these cosigners as they have essentially guaranteed the repayment of your loans. Talk to a bankruptcy attorney to figure out which chapter of bankruptcy you might be eligible for, and which would be best for both you and your affected cosigners.

Source:
U.S Courts - Bankruptcy Basics After 2005

About the Author:
Heindrick So works for a Bay Area Real Estate company that specializes in residential wholesale lending. His work experience is comprised mostly of sales and marketing background which included a high end media sales position at Magnolia Hi-fi. Heindrick is also in his final year of pursuing his Bachelor's Degree in Electrical Engineering at San Jose State University.