Maybe your mom did it. Or maybe your best friend did.
Either way, someone in your life has co-signed for a loan. It’s probably a car loan (50% of them are), but it could be a personal loan, student loan, or credit card, too.
Now you’re contemplating bankruptcy. What happens to your co-signer?
You should tell your co-signer the moment you have trouble making payments.
One of the biggest reasons why co-signing tanks people’s credit scores is the creditor tends to wait around before contacting the co-signer. They might let thirty, sixty, or ninety days of missed payments fly by before they finally pick up the phone to call the person who guaranteed the loan.
Even though the creditors aren’t calling, they’re reporting the missed payments on the co-signer’s credit just like they’re reporting it to yours.
So one of the biggest steps towards protecting your co-signer might be one of the hardest. You’re going to have to tell them as soon as you’re in trouble so they can decide whether they can make the payments that will protect their credit. If you’re going to declare bankruptcy you should also share that intention with them, and tell them you intend to talk to your lawyer about how you can protect them.
If you’re not careful, the co-signer could end up liable for the entire loan.
Though most people fail to realize it, a co-signer isn’t just a reference. A co-signer is agreeing to guarantee the loan if you can’t pay it. That includes a loan that you may be discharging through bankruptcy.
The person who co-signed for you took a big risk. Studies show people who co-sign for loans are likely to have lower credit scores and retire much later.
If you want to protect your relationship with your co-signer, you’re going to have to play it smart.
Option 1: Your co-signer tries to get off the loan.
There are two paths you can take here.
Your co-signer can try to pursue a co-signer release.
Or you can try to refinance the loan in your name alone.
In either case, it’s a good idea to go ahead and secure a qualified bankruptcy attorney so you can make sure neither of these maneuvers hurts your case in any way. There are pitfalls you need to know about, and the timing matters.
See also: Modifying Your Home Loan During Bankruptcy.
Option 2: Voluntary repayment.
If you declare Chapter 7 you can reaffirm the debt after the discharge and protect your co-signer by paying it. Do this only if you know for certain you’ll be able to afford to pay that debt when the bankruptcy is complete.
Otherwise, you and your co-signer might just end up right back at square 1.
Option 3: Chapter 13.
If you agree to pay 100% of the co-signed debt through your Chapter 13 plan then your co-signer should be completely protected. This is only true if you agree to pay everything, since the co-signer would be on the hook for any unpaid balances.
This must be handled correctly or you risk creating huge problems for your friend or family member.
Have questions?
Don’t try to guess. Everyone’s case is different. Contact us for your free case evaluation today. We can show you how to protect your co-signer, and yourself, during the bankruptcy process.