If My Cosigner Filed Bankruptcy, Does It Affect Me?
Unpack the implications when your loan cosigner files for bankruptcy. Understand your ongoing financial obligations and credit standing.
A cosigner on a loan acts as a guarantor, agreeing to be responsible for the debt if the primary borrower defaults. This arrangement helps individuals with limited credit history or lower income qualify for financing, such as car, personal, or student loans. When someone cosigns, they become equally accountable for the debt. If a cosigner files for bankruptcy, it can have significant implications for the primary borrower.
Your Responsibility for the Debt
When you have a cosigner on a loan, you both share “joint and several liability.” This means each party is individually responsible for the entire debt, not just a portion. If one borrower defaults, the lender can pursue either party for the full outstanding balance. A cosigner’s bankruptcy may discharge their personal liability, but it does not automatically eliminate the primary borrower’s obligation.
The lender still expects the primary borrower to continue making all scheduled payments. If the cosigner stops contributing due to bankruptcy, the full burden of repayment falls on the primary borrower. For instance, if a cosigner on a car loan files for bankruptcy and ceases payments, the primary borrower becomes solely responsible for the entire monthly payment to avoid default. This shift can significantly impact the primary borrower’s financial capacity.
How Your Credit is Affected
A cosigner’s bankruptcy filing will not directly appear on the primary borrower’s credit report. Your credit report reflects your own financial obligations and payment history, not someone else’s personal bankruptcy. However, indirect effects can be substantial.
If the cosigner stops making payments on the jointly held debt and the primary borrower does not cover these missed payments, the lender will report delinquencies to credit bureaus. These missed or late payments will negatively affect the primary borrower’s credit score and report. A loan default, even if triggered by the cosigner’s inability to pay, will reflect on both parties’ credit histories as it is a shared obligation. This can make it harder for the primary borrower to obtain new credit or secure favorable terms.
Variations by Bankruptcy Chapter and Debt Type
The impact of a cosigner’s bankruptcy on the primary borrower varies depending on the bankruptcy chapter filed and the debt type. In a Chapter 7 bankruptcy, the automatic stay temporarily halts collection efforts against the individual who filed. However, this stay does not protect a non-filing cosigner; creditors can still pursue the primary borrower for repayment. Once the cosigner receives a discharge, their personal liability is eliminated, leaving the primary borrower solely responsible for the entire debt. Creditors can petition the court to lift the stay to pursue the primary borrower if the loan is not being paid.
Chapter 13 bankruptcy, a reorganization and repayment plan, offers more protection to the primary borrower through a “co-debtor stay.” This stay prevents creditors from pursuing the cosigner as long as payments are made on the cosigned debt according to the court-approved plan. This protection applies to consumer debts, such as credit cards, car loans, and mortgages, but not tax debts. If the Chapter 13 plan does not include full payment for the cosigned debt, or if the cosigner defaults on their plan, the co-debtor stay can be lifted, allowing creditors to pursue the primary borrower.
The type of debt also influences the outcome. Secured debts, like mortgages or car loans, involve collateral. If the cosigner files for bankruptcy and the primary borrower does not maintain payments, the lender can still repossess the collateral. For unsecured debts, such as personal loans or credit cards, the cosigner’s discharge in Chapter 7 means the primary borrower becomes fully responsible for the entire amount. Student loans are non-dischargeable in bankruptcy for both the borrower and cosigner unless an “undue hardship” test is met. Even if a primary borrower’s student loan debt is discharged, the cosigner’s liability remains.
Navigating Your Financial Situation
When a cosigner files for bankruptcy, understanding your ongoing obligations is important. The first step involves contacting the lender directly to understand the loan’s status and confirm payment expectations. Open communication with the lender can clarify any changes to the account or payment schedule.
Monitoring the loan account for payments and notices from the lender is important. This includes reviewing statements to ensure payments are properly applied and to identify potential issues early. If you anticipate difficulty making payments alone, exploring payment arrangements with the lender is advisable. Lenders may offer options such as deferment, forbearance, or loan modifications, which can adjust the loan terms to make payments more manageable. These modifications might involve lowering the interest rate, extending the repayment period, or reducing the principal balance to ease the financial burden.