You co-signed for another person who has run into financial trouble or sought a co-signer for your loan.
What happens to you when they declare bankruptcy, and what should your own next steps be?
Here’s what you need to know.
A Loan May Default
If you are the primary borrower and your co-signer declares bankruptcy, your loan may go into default.
This is because the initial loan contract rested on the stipulation that you’d have this other person backing you up, remaining responsible for the loan if you cannot pay.
If you know your co-signer is about to file bankruptcy, contact your loan company to make arrangements immediately or contact a bankruptcy lawyer.
Chapter 7 vs. Chapter 13
The creditors are likely to go after the co-signer. The person you co-signed for will be relieved of the financial obligations, but you won’t.
The entire debt balance will pass over to the co-signer regardless of whether you are a co-signer or a guarantor. There will be a lag period in hearing from these creditors thanks to the automatic stay, but the co-signer can expect to start receiving calls as soon as the borrower’s bankruptcy is discharged. If the co-signer wants to protect their credit score, it’s best to continue making the payments before collection activities start.
Many co-signers in this position choose to file bankruptcy themselves to protect their finances, but it depends on your financial situation. Paying the obligation might make more sense if the co-signer has an amazing credit score and plenty of money.
If the borrower filed for Chapter 13, the co-signer will benefit from the automatic stay, ensuring they aren’t bothered by collection activities.
The borrower will make payments to pay off their debts under the plan. The co-signer generally won’t have to make payments during that time. However, if the loan is not paid off during the course of Chapter 13 bankruptcy, the co-signer can expect that the creditor will want them to pay the remaining balance.
If you received a benefit from the borrower’s loan, the court may request a lift of the automatic stay so they can pursue collections.
Get Help Today
Bankruptcy law can get complicated, and complications arising from co-signer issues are no exception.
If your financial situation has turned complex, don’t hesitate. Reach out to Haysom Law to get help today.
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