When someone co-signs a loan on your behalf, he or she is standing up for you and is responsible for paying the loan should you default. The person who co-signs on a loan is a person who is more creditworthy than you and is a reliable source for the credit or finance company to refer to.
If you intend to file bankruptcy and someone has co-signed a loan for you, you need to know what can happen to the status of the loan.
What Happens if Your Default on the Loan?
When a bank or other financial institution requires a co-signer for your loan, the lender does so to make sure they receive payment should you not pay the loan yourself. Parents are often a co-signer for their young adult children, but co-signers are also common when people do not have enough credit to obtain the loan themselves.
If you have a co-signer for your loan and you fail to make your payments, the financial institution will contact the person who signed for you and pursue payment. This can cause problems between your and the person who vouched for you.
What Happens to the Loan in Bankruptcy?
If you are unable to manage your debt, you may consider bankruptcy. However, you may have questions as to what happens to your co-signer. The bankruptcy will issue a court order to your creditors to cease contact with you to collect on your debt during the course of bankruptcy court.
This is helpful to you, but the court order does is not afforded to your co-signer. The financial institution will continue to contact your co-signer to obtain payment.
What Can You Do to Provide Relief for Your Co-Signer?
When you plan to file for bankruptcy, you can do some things to help take the financial burden off your co-signer. First, consider filing Chapter 13 bankruptcy. Chapter 13 lets you work out a payment plan over a span of several years to help you pay off your debt.
If you cannot file for Chapter 13 bankruptcy, you can reaffirm your debt under Chapter 7 bankruptcy. When you reaffirm your debt, you leave the debt out of your bankruptcy and can continue to make your own payments. This will keep the creditors from contacting your co-signer as long as you continue to pay.
If you do wish to reaffirm the debt, you can wipe the debt from your credit and make the co-signer whole. You will, however, have to list both yourself and your co-signer on the bankruptcy schedule.
You can also discharge the debt with a Chapter 7 bankruptcy but continue to pay off the debt. Once you go through the bankruptcy process, you will have more money at your disposal and can more easily pay off the debt yourself.
The creditor does have the right to ask for the court's permission to go after the co-signer if the bankruptcy does not pay the debt. You need to follow the instructions of the bankruptcy completely to make the co-signer whole. This is the right thing to do if you intend to have a healthy relationship with the person who helped you in a time of need.
If you have a co-signer on a loan and you want to file for bankruptcy, please contact us at the Flowers Law Firm. We provide bankruptcy services across the Pine Belt. Our firm provides affordable excellence and trusted legal services. Let us know if you have any questions about the bankruptcy process so we can help you find the bankruptcy option that is best to help secure your financial future.