How Does Bankruptcy Affect Cosigned Loans?

Bankruptcy is challenging for everyone involved, but the situation can become even more complex when cosigned loans are in the mix. If you’re considering bankruptcy but are worried about what will happen to your cosigned loans, read on to learn more.

What Is a Cosigned Loan?

A cosigned loan is a type of loan where two or more people apply for and are responsible for paying back the loan. In most cases, one person has better credit than the other and acts as the “cosigner” to help secure a lower interest rate or higher loan amount. Both parties are equally responsible for paying back the loan, which means if one person cannot make payments, the other must cover them.

What Happens to Cosigned Loans in Bankruptcy?

When an individual files for bankruptcy, their cosigned loans are affected in different ways depending on what kind of bankruptcy they file, Chapter 7 or Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, or liquidation bankruptcy, involves the sale of assets to pay off debts. This type of bankruptcy can include both secured and unsecured debt, such as credit card debt or medical bills. In a Chapter 7 bankruptcy case, cosigned loans are typically discharged along with the primary borrower’s other debts.

However, there are some exceptions to this rule. If the cosigner is a family member who has provided a loan for household expenses (such as rent or groceries), their obligation may not be discharged under Chapter 7 bankruptcy. Additionally, if the primary borrower fraudulently obtained the loan or engaged in any other illegal activity, the cosigner may still be held responsible for the debt.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy involves creating a repayment plan to pay off debts over three to five years. This type of bankruptcy is often used by individuals who do not qualify for Chapter 7 due to their income level or have assets they wish to protect from liquidation.

When it comes to cosigned loans, Chapter 13 bankruptcy can provide some relief for both the primary borrower and the cosigner. The automatic stay that goes into effect when the bankruptcy is filed stops collection activities on all debts, including cosigned loans. With the repayment plan, the primary borrower can catch up on missed payments and even reduce the overall debt amount. This can also benefit the cosigner as they are no longer at risk of being pursued for payment by creditors.

Potential Risks for Cosigners

Regardless of which type of bankruptcy is filed, there are still potential risks for cosigners. If a cosigner’s credit score was already impacted due to missed payments or default by the primary borrower, filing for bankruptcy will not improve their score immediately. It can take several years to rebuild credit after a bankruptcy.

Additionally, creditors may come after the cosigner for payment if the primary borrower fails to make payments under a Chapter 13 repayment plan. In this case, the cosigner may be held responsible for the total loan amount, even if they were not originally required to pay.

Let Professionals Help You Navigate the Complexities of Cosigned Loans

In conclusion, bankruptcy can have varying effects on cosigned loans depending on the type of bankruptcy filed and individual circumstances. It is important for both the primary borrower and cosigner to carefully consider all options and seek legal counsel before making any decisions related to bankruptcy. Communication is key to navigating this complex situation and minimizing potential risks for all involved.

If you’re considering bankruptcy, reach out to Whitten & Whitten for experienced legal guidance. Our team enjoys helping individuals and families find the best solution for their financial situations. Let us help you navigate this challenging time with confidence and peace of mind.