What Happens to Cosigners When the Primary Borrower Files Bankruptcy?
When someone files for bankruptcy, it can be a stressful and confusing time. This situation often becomes even more complicated when co-signers are involved. Many people wonder, what happens to co-signers in bankruptcy? Basically, a co-signer is legally obligated to repay the debt if the primary borrower fails to do so.
Now, what happens to co-signers in bankruptcy is largely dependent on the type of bankruptcy filed, but it’s rarely good news for the co-signer. The bankruptcy process might offer some temporary relief for the primary borrower, but the responsibility usually shifts to the co-signer. Let’s dive deeper into the specific ways that bankruptcy can impact co-signers.
The Impact of Chapter 7 Bankruptcy on Co-signers
Chapter 7 bankruptcy, sometimes called liquidation bankruptcy, involves the selling of a debtor’s assets to repay creditors. Under Chapter 7, a co-signer is fully liable for the debt.
It’s crucial for anyone who has co-signed a loan to understand this: if the borrower files for Chapter 7 bankruptcy, the responsibility for repayment will fall squarely on them. Creditors are then free to go after them directly for the entire outstanding amount.
Credit Score Impacts
This can be troublesome. First, it can obviously put a huge financial burden on the co-signer. Then there are other ramifications. Chapter 7 bankruptcy doesn’t directly impact the cosigner’s credit score. However, any missed payments on that debt — since it is now their responsibility — will hurt their credit score, potentially by 200 points or more.
A bad credit score will hurt their ability to get loans in the future. It can affect interest rates when applying for credit cards and even impact job opportunities or renting an apartment. Some employers, landlords, and insurance companies check credit reports during the screening process. This can happen as part of background checks and might make it harder to rent an apartment, get approved for a loan, or even secure certain jobs.
The Impact of Chapter 13 Bankruptcy on Co-signers
Chapter 13 bankruptcy, often called a wage earner’s plan, offers a bit more protection for co-signers than Chapter 7 but is still risky. Basically, Chapter 13 works like this: the person who owes the money sets up a repayment plan lasting 3 to 5 years.
This plan, overseen by the court, aims to pay off some or all their debts. During a portion of this repayment period, a provision called a “codebtor stay” can be helpful. A codebtor stay prevents creditors from pursuing the co-signer for payments.
Possible Outcomes and Considerations
Although Chapter 13 provides some protection to a co-signer during this plan, it’s not full-proof. Here’s why: the lender can petition the court to lift that protection.
If the court decides in the lender’s favor, they could legally demand payment from the co-signer. For instance, if your Chapter 13 payment plan doesn’t include the full debt you have with a cosigner, the lender might seek to remove the protection.
Even worse, after your Chapter 13 plan is finished, creditors can pursue the cosigner for any outstanding debt you didn’t manage to cover during that time. Even though co-signers receive more protection with Chapter 13 bankruptcy, cosigners should monitor their credit report closely. They should make sure all payments are being made on time during the Chapter 13 process and immediately contact a lawyer to discuss possible options if a lender starts to put pressure on them for repayment.
When Bankruptcy Doesn’t Provide Protection
Both Chapter 7 and Chapter 13 can have a negative impact on credit score. Additionally, both pose a real threat of creditors demanding repayment. Some debts, though, can’t be wiped out even with bankruptcy.
Types of Debts Not Discharged by Bankruptcy
Examples include things like child support, some income taxes, and debts from malicious acts or fraud. Student loans are often the type of debt cosigners might be wondering about most. If a debtor can’t discharge a student loan in bankruptcy through something like undue hardship, the lender can still try to get the money from the co-signer. If you’re facing overwhelming debt, it is important to educate yourself on what debts can be discharged in bankruptcy. Understanding these specific situations, as well as what qualifies as qualifying debts, is crucial for anyone considering bankruptcy.
Navigating Co-signer Situations During Bankruptcy
It can be pretty hard to know where to go or what to do if your friend or relative declares bankruptcy, especially if they have included cosigned debts on things like a car loan. Here’s some advice to help cosigners during bankruptcy situations.
1. Understand Your Legal Obligations
When co-signing, you accept the legal responsibility for the debt alongside the borrower. During bankruptcy, the co-signer’s obligations on a debt do not change.
2. Communicate
Start by talking openly and honestly with the person who filed. This is a delicate subject but understanding their plan, intentions, and ability to manage repayments moving forward can give you, the cosigner, peace of mind. This can be difficult, especially if you are worried about jeopardizing a personal relationship.
3. Consult a Lawyer
It’s always advisable to talk to an attorney experienced in bankruptcy issues, especially when it comes to your codebtors. A good lawyer can explain the details specific to your situation and state.
Additionally, they can advise you on the best way to protect yourself, as what happens to cosigners in bankruptcy varies for each person’s circumstance. To get a better grasp on the intricacies involved, it can be beneficial to understand the legal framework. Consider reading The Codebtor Stay for more insights.
4. Consider Repayment Options
If the person who borrowed can’t or won’t repay the loan, work with the lender to explore options like restructuring the loan or arranging a new payment schedule.
Remember that by working with the lender, you can try to mitigate damage to your credit score. You may also want to consider seeking advice from resources or professionals specializing in bankruptcy and credit cards.
5. Stay Informed and Prepared
Being in debt is bad, but not knowing how to deal with it can be scary. Staying up to date on relevant laws can help protect yourself from negative financial consequences.
Cosigners can check out TheBankruptcySite for detailed, easy to read bankruptcy articles.
FAQs About What Happens to Co-signers in Bankruptcy
Does Chapter 13 protect cosigners?
Yes, but it is limited. During the repayment period of a Chapter 13, the cosigner is generally protected from creditor collections thanks to something called the “codebtor stay.”
But remember, this protection is not a sure thing. A lender can ask the court to end it. The level of protection given to the cosigner also depends on the individual circumstances, how the plan is set up, and how the lender chooses to handle it.
What happens to collateral in case of bankruptcies?
When filing for either type of bankruptcy, the bankruptcy court has the right to sell assets to repay what the filer owes. That could mean the house, car, or boat, but not everything gets sold off.
Each state allows bankruptcy filers to protect some assets with an “exemption,” but those vary by location. For example, the rules regarding I File Chapter 13 Bankruptcy in one state might differ significantly from another.
Can I buy a house with a cosigner after bankruptcy?
Bankruptcy doesn’t ban anyone from ever getting a mortgage again. Buying a house after Chapter 7 bankruptcy is definitely more difficult because a person has to wait between two and four years after their discharge date. Refinancing an existing mortgage or getting a loan to buy a new property isn’t allowed during those years.
During this waiting period, you might focus on improving other aspects of your financial health. Consider taking a debtor education course, as mandated by many courts, to demonstrate financial responsibility and enhance your chances of securing a mortgage later.
What happens if one person on a car loan files bankruptcy?
That all depends. There are different options for car loans when filing for bankruptcy. Under Chapter 13, if the repayment plan pays the car loan as agreed, the car can be kept.
Under Chapter 7, debtors can give back the car, redeem the car by paying its market value, or even reaffirm the loan to try and protect their credit. However, it’s important to remember that reaffirming the debt means waiving your rights under bankruptcy. For more in-depth information on handling specific scenarios like car loans, it’s advisable to refer to comprehensive bankruptcy articles or speak with an attorney.
Conclusion
You might feel confused when it comes to what happens to cosigners in bankruptcy. There’s no easy answer, since cosigners take on huge financial risk and often face stressful decisions.
Knowing your legal obligations, communication, seeking guidance, and actively working towards solutions will all contribute to effectively navigating this complicated scenario. Keep in mind that when borrowers default on their payments, it is often the co-signers who are left to bear the brunt of the financial burden. If you find yourself in such a situation, understanding your rights and responsibilities is paramount.