What Happens If Co-Signer Files Chapter 7?
While Chapter 7 bankruptcy can relieve the co-signer of their legal obligation to repay the debt, the primary borrower remains responsible. In some cases, the loan agreement has a clause that puts the loan in default upon the co-signer’s bankruptcy. Depending on the specific terms of the loan agreement, the lender could demand full repayment or take other actions.
What is a Co-Signer?
Borrowers who apply for student loans, car loans, and, in some cases, mortgages who do not have established credit or have a spotty credit history may require a co-signer. If the primary borrower fails to make payments, the lender has the right to demand the co-signer make those payments.
When someone co-signs for any type of loan, they are legally responsible for the debt as the primary borrower.
When Does a Creditor Require a Co-Signer?
Lenders may require a co-signer when the primary borrower does not meet the lender’s criteria for loan approval on their own. The borrower may need more credit history, more income to meet the debt repayment, a high debt-to-income ratio, or an employment history that lacks stability.
Bankruptcy and Co-Signing
When the primary borrower files for bankruptcy, an automatic stay is enacted, halting all collection efforts against the debtor. When a loan is a consumer debt (like a car loan or credit card) that automatic stay extends to even a non-filing co-debtor. Despite the automatic stay, however, the co-signer remains responsible for the debt and after the bankruptcy case concludes (or relief from the automatic stay is granted) the lender can pursue the co-signer for payments. If the primary borrower’s debt is discharged in bankruptcy, the co-signer’s liability will remain unless the co-signer also files for bankruptcy.
Chapter 7 Bankruptcy Doesn’t Erase a Co-Signer’s Obligation
When the primary borrower files Chapter 7 bankruptcy, they erase their own debt. However, when this occurs, the co-signer remains legally and financially responsible for any loans which they have agreed to co-sign.
Will My Co-Signer Be Liable for Debt if I File Bankruptcy?
Yes. Even if you discharge the debt through bankruptcy, the co-signer remains liable and will be expected to pay it off. If you’re considering bankruptcy and have a co-signer, it’s a good idea to discuss the situation with them and possibly consult a financial advisor or bankruptcy attorney to understand all the implications.
Steps to Protect a Co-Signer If You File for Bankruptcy
Communication with a co-signer is important. Make sure they know you intend to file a bankruptcy petition. You can do some things to ensure that your co-signer does not have to make payments on a loan they have helped you obtain. These include:
- Reaffirm the debt — one option a borrower has when filing for bankruptcy is to reaffirm a debt. If you have a loan with a co-signer, this could help protect them from being immediately liable for the complete loan once a Chapter 7 bankruptcy has been discharged.
Contact an Experienced Bankruptcy Lawyer Today
The decision to file bankruptcy is never easy. If you have loans with a co-signer, you should consult with an experienced bankruptcy attorney at Sasser Law Firm to ensure you understand the long-term consequences for the co-signer.
Bankruptcy can be a complicated process with significant impacts on you and anyone who has cosigned for your debts, so professional advice is crucial. If you are considering bankruptcy and have one or more loans impacted by a co-signer, call Sasser Law Firm at (919) 319-7400 for a free consultation or use our online contact form.
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For more than 20 years, the Sasser Law Firm has been helping individuals and business owners sort through financial hardships to see the light at the end of the tunnel. Our North Carolina bankruptcy attorneys are all board-certified specialists, which means we have passed a complex exam, undergone a thorough peer review, and continue to earn legal education credits in this ever-evolving area of law.
