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If anyone you love cosigned on a loan so you could get a house, buy a car, rent an apartment or make some other purchase it’s important to know exactly how bankruptcy could impact them. And once they’re on, while it’s not impossible to get them off the loan, it can be very hard.
Many cosigners get burned, and when they do it can tear families apart. You must handle this correctly if you want to maintain your relationships and avoid creating problems for the person who trusted you.
The Definition of a Co-Signer
When someone cosigns on a loan they are putting your name on a contract which says they are agreeing to pay the loan if the primary loan holder can’t do it. The creditor approves a marginal loan on the basis of a co-signer because there is a good chance they’ll be able to get the cosigner to pay it.
So when you file for bankruptcy, the debt doesn’t go away. Not the way it would if you didn’t have a cosigner. Handle this incorrectly, and you could end up sticking your cosigner with the bill.
It can be handled correctly. You have three options.
Co-Signers When You Can’t Pay Your Debt at All
Your cosigner is going to start having problems with his or her credit score soon after you start making late payments or skipping payments. If you just default on the debt you might destroy your cosigner’s credit before they know anything’s amiss. The collectors don’t tend to start calling the cosigner until they’ve given up on you.
You of course have the option of talking to your cosigner to see if they really are in a position to help. They might be willing to take over payments until you’re back on your feet. That is, after all, theoretically what they signed on for. But it’s not something you should bank on, as many individuals cosign on loans with the expectation their trusted family member or friend would never make that loan a problem for them.
Co-Signers When You File Chapter 7
If you’re going to file Chapter 7 you need to be aware that while your debt will be discharged your co-signer’s won’t be. At that point your cosigner will bear full responsibility for the debt, which is the situation most people want to avoid.
You do have the option of reaffirming the debt so you can maintain responsibility for it. But if you couldn’t pay the bill before your bankruptcy can you really handle it after your bankruptcy, even with all your other payments wiped away?
And since it will be years before you can file again, this time there won’t be any recourse for you if you can’t pay the debt.
Co-Signers When You File Chapter 13
For many debtors with cosigners, Chapter 13 becomes the obvious choice. You keep your cosigner out of it because the debt is part of your Chapter 13 payment plan. You’re still paying your debt, and doing so over the course of up to 5 years at 0% interest.
While there are other considerations that should go into the choice to file Chapter 7 or Chapter 13, this one is a big one.
Get good advice from the start.
Navigating sticky issues like cosigners, the type of bankruptcy you file, and other problems that might come up during the process is something you absolutely should never attempt on your own.
Instead, bring the details of your situation to a free consultation with the Ledbetter Law Firm.