What Happens to the Cosigner if the Signer Goes Bankrupt?

By James Sokolowski

When someone cosigns a loan for you, they are promising to repay the money if you don’t. A lender will require you to have a cosigner if it believes you are a high risk borrower or may default on the loan. Going bankrupt may relieve you of your obligation to repay the loan; however, your cosigner may be on the hook for the entire balance owed.

Seeking Bankruptcy Protection

When you first file your petition for bankruptcy, you must list all of your creditors, including the lender and your cosigner. If you file for bankruptcy under Chapter 7, you are asking the court to discharge, or wipe out, your entire obligation to repay the loan. If you file under Chapter 13, you will make reduced payments on the loan and other debts for three or five years. After that, the court will discharge whatever is left on the loan. The discharge – in either Chapter 7 or 13 – will also prevent your cosigner from taking legal action against you for reimbursement of any monies she paid to the lender.

Chapter 7

If you successfully go through Chapter 7 bankruptcy, the court will discharge the loan, so you have no more legal obligation to repay it. But the debt still exists, and from the lender’s point of view, you defaulted on the loan. The lender will simply turn to your cosigner and demand she repay the unpaid debt. The lender can use its full arsenal of collection tactics against your cosigner, such as hiring a collection agency, suing the cosigner and garnishing her wages.

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Reaffirming the Loan in Chapter 7

When you file for Chapter 7, you can - with the court’s permission - reaffirm the loan. This means you renew your promise to repay the loan, and the debt is not discharged in bankruptcy. Of course, you must continue making payments until the debt is paid off. Otherwise, the lender can take collection actions against you and your cosigner.

Chapter 13

If you file for bankruptcy under Chapter 13, you would make monthly payments toward the loan and other debts on a court-approved schedule. During the repayment period, you – and your cosigner, in most cases – are protected by an “automatic stay,” which prevents the lender from taking collection actions. If you completely pay off the loan in the repayment plan, you and your cosigner owe nothing more to the lender. However, if you still owe money after the repayment plan is over, the court will discharge your obligation to pay the remaining amount. As a result, the lender will then attempt to collect the remaining balance from your cosigner.

Protecting Your Cosigner

Even though bankruptcy will remove your legal obligation to pay the lender, or reimburse your cosigner if she paid the lender, you may want to reimburse your co-signer anyway, especially since she is probably a family member or close friend. After your bankruptcy is discharged, you’re free to pay her back.

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Is a Cosigner Safe in a Chapter 13?


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Will I Receive Notice to Vacate After a Bankruptcy Is Discharged?

Your landlord may not automatically evict you from your apartment just because you sought bankruptcy protection from your creditors. Your ability to keep your apartment depends on the type of bankruptcy that you file, the status of your rent payments to your landlord, and whether you keep your lease. Bankruptcy, however, does not prevent your landlord from removing you from the rental unit if eviction procedures were initiated before you filed your bankruptcy petition.

What If My Cosigner Files Bankruptcy?

If your debts have become unmanageable, you have the option of filing for bankruptcy protection. In a Chapter 7 bankruptcy, you surrender non-exempt assets to a court-appointed trustee who uses them to repay your creditors. In a Chapter 13, the trustee administers a repayment plan under which you pay a percentage of your debts. At the end of your bankruptcy, the court discharges or cancels all debts that can legally be discharged. If you have cosigned a loan and your cosignor files for either Chapter 7 or Chapter 13, you may still be responsible for repayment of the loan in full.

Will I Lose My Car if My Chapter 13 Is Dismissed?

Vehicles are one type of asset the court can address during Chapter 13 bankruptcy, but a dismissal won’t necessarily affect your ownership of a vehicle that has been paid off. Since the only creditor who can repossess your vehicle is the one who holds the loan on it, none of your other creditors can take your car. However, if your case is dismissed, you may have to sell some of your assets, including your car, to raise the cash to pay your remaining debts.


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