It is not uncommon for individuals to take on cosigners for their loans. Cosigners put a lot on the line when they agree to take on this responsibility, but the greatest risk of all is that an individual may go bankrupt down the line. Read on to discover how a bankruptcy filing may affect your cosigner and how a seasoned Louisville, Kentucky consumer bankruptcy lawyer at Schwartz Bankruptcy Law Center can offer protection.
What Is a Cosigner, and Why Do Lenders Require One?
When you first work towards financial independence, you may not qualify for loans on your own. Instead, lenders may request that you include a cosigner before agreeing with you. This is so lenders can feel more secure in knowing that, should there come a time when you cannot pay back the loan, the cosigner will take full responsibility for picking it up. Lenders may even agree to more attractive terms for your loan or even a higher loan amount if you obtain a cosigner.
A cosigner may be a family member, a friend, or, otherwise, a loved one who is willing to put their credit report at risk to help you out. If you are considering bankruptcy, you should identify which of your accounts has a cosigner before you file.
Common Reasons You Might Need a Cosigner
- Little credit history
- Past bankruptcy filings
- No collateral available
- Low credit score
- The requested loan amount is above your income qualification
- You require better terms
Loans that Commonly Involve Cosigners
- Auto loans
- Student loans
- Home improvement loans
- Medical financing
- Personal Loans
How Does Chapter 7 Bankruptcy Affect My Cosigner?
When you file for bankruptcy, regardless of the chapter, you are granted something called an automatic stay. Essentially, this halts all collection efforts against you, like lawsuits, wage garnishment, and even phone calls from creditors. However, during Chapter 7 bankruptcy, the automatic stay only protects you, not your cosigner.
Additionally, at the end of your bankruptcy filing, you may be granted a debt discharge. This means that you are no longer legally obligated to repay the debts in your name. However, this discharge does not extend to your cosigner, meaning they will still be liable for the debts they cosigned.
What Creditors Can Still Do in Chapter 7
- Pursue the cosigner for full repayment
- Send collection letters
- File a lawsuit against the cosigner
- Report delinquencies that will appear on their credit report
Why Your Cosigner Remains Responsible
The bankruptcy court does not view your cosigner as a friend who was looking to help you out. Instead, they are viewed as a co-debtor, and their obligation to repay the debt is not wiped out during your individual bankruptcy filing.
How Does Chapter 13 Bankruptcy Affect My Co-Signed Debts?
Unlike Chapter 7, Chapter 13 bankruptcy can provide significant protection for the co-signers of debts. This is because this chapter offers a co-debtor stay. As such, the protections you receive under the automatic stay will be extended to your creditors. This is because the primary purpose of Chapter 13 is to repay as much of the debt as possible through your three- to five-year payment plan. As such, your cosigner will remain protected only if you successfully complete the entire plan.
What the Chapter 13 Co-Debtor Stay Does
- Stops creditors from pursuing the co-signer
- Prevents lawsuits and collections for the duration of the payment plan
- Protects only consumer debts, not business debts
When a Creditor Can Ask the Court to Lift the Co-Debtor Stay
In some instances, a creditor may petition the bankruptcy court to lift the automatic stay, thus allowing them to pursue collection efforts. The court will consider this if the creditor can show:
- The debtor isn’t going to pay the debt in full
- The co-debtor received the benefit of the loans
- They will suffer irreparable harm if the debt is not paid
What Happens if You Miss a Chapter 13 Payment
In the event you fail to make on-time payments or you default on your payments, the court may remove the protection of the automatic stay. As such, this allows the creditors to pursue your cosigner. Ensuring compliance with your payment obligations is critical if you wish to protect your cosigner from the impact of bankruptcy.
Contact an Experienced Louisville Bankruptcy Attorney Today
If you are considering filing for bankruptcy but you have a cosigner on loans that would be impacted, it’s critical to work with the experienced team at Schwartz Bankruptcy Law Center. Our team has helped countless individuals in Louisville, Jefferson County, and the surrounding community, and we can help you explore your legal options to determine the best course of action. Contact our team today to learn how we can assist you through these difficult times to help you regain control of your finances.
