I often meet both borrowers who wish to file bankruptcy and co-signers who wish to file for bankruptcy. What happens?
Outside of bankruptcy, the rule is that a co-signer can be held liable for any debts the borrower has not paid. When a person co-signs a loan for another, the creditor reports the loan to the credit bureaus and it appears on both the primary borrower's credit report and the co-signer's credit report.
Co-Signer Responsibility
If the borrower does not pay the loan, the lender can look to the co-signer for payment, can sue the co-signer for nonpayment, obtain a judgment, and levy upon the co-signer's bank account or garnish the co-signer's wages. Even worse, the creditor may place a judgment lien against any property owned by the co-signer, preventing that person from receiving the proceeds from the sale or transfer of the property without first paying off the co-signed debt. In other words, a co-signer guarantees repayment of the debt if the borrower does not repay the debt.
Is Co-Signer Responsible In Bankruptcy? Chapter 7 vs. Chapter 13
What happens in bankruptcy? If the borrower can pay off the loan through a Chapter 13 repayment plan, the co-signer will not be held responsible for repaying the debt. However, if the loan is discharged in a Chapter 7 bankruptcy, the borrower will no longer be responsible for the debt and the entire burden of the debt will be borne by the co-signer. But if the borrower reaffirms the debt in Chapter 7, then the borrower alone is responsible for the debt even after the bankruptcy is over. The answer is - the co-signer should also consider filing bankruptcy.
Student Loan Co-Signer Responsibility
As an aside, student loans are different. Student loans can only be discharged for "hardship." Again, however, the co-signer must pay if the borrower does not, regardless of whether the co-signer is a senior citizen whose only income is social security.
So, think twice before co-signing a debt. If you have co-signed a debt, and the borrower is not paying the debt, call me and we can talk about your options.
If you need help in the area of consumer bankruptcy, contact our attorneys today for a free consultation.
