Bankruptcy and Cosigners
The economic changes over the last several years have forced more Americans into bankruptcy then ever before. It is estimated a bankruptcy case is filed every ninety seconds. That is an astonishing figure! If you are one of the statistics or are considering filing, you may be wondering what the ramifications may be regarding bankruptcy and cosigners. That is exactly what this article will address.
By definition, a cosigner agrees to pay the terms of the loan if the borrower defaults. Most cosigners do so trusting the person with whom they are jointly signing a financial commitment to be able to pay the loan. What happens if the principal debtor falls into dire straits and files bankruptcy? What are the legal consequences with regard to bankruptcy and cosigners?
In the case of Chapter 7 bankruptcy, where assets are liquidated to pay creditors, oftentimes the remaining outstanding debt will be discharged, relieving the debtor of financial liability. However, the rules affecting bankruptcy and cosigners turn the responsibility of honoring the loan or credit agreements over to the co-debtor.
Chapter 13 bankruptcy offers more protection for the cosigner. Chapter 13 is a reorganization program whereby the debtor pays one affordable monthly payment to the court trustee who is responsible for distributing funds to the creditors. The provision for Chapter 13 bankruptcy and cosigners offers a ‘co-debtor stay’ as long as the filer follows the repayment plan. This frees the cosigner of financial liability and saves his credit rating from becoming damaged.
A Chapter 13 co-debtor stay applies to consumer debt. Examples are car loans, credit card agreements and personal loans. Each state has their own rulings as to whether a cosigner would be protected under the stay regarding cosigned home loans. It would be prudent to have this issue clarified when considering bankruptcy as a solution to debt problems.
It is important to note with regard to bankruptcy and cosigners that if at the end of the repayment period of three or five years, there is an outstanding balance on a cosigned loan, the cosigner becomes liable for the balance.
Think twice before asking a cosigner to put his credit on the line. If you can’t keep up your end of the bargain, the consequences affect more than yourself.