Bankruptcy is never easy and it’s never fun. And it only gets more complicated and complex and stressful when a co-signer is involved. Are you or someone close to you thinking of co-signing for a family member or friend? If so, you need to keep bankruptcy in mind.
It’s essential to understand the repercussions of co-signing a loan for a friend or family member, especially if you or the principal borrower are considering bankruptcy. In bankruptcy, co-signed debts are differentiated than individual loans.
The most essential thing to remember when you are a co-signer is that if the individual for whom you have co-signed files for bankruptcy, your credit may suffer. But there is more to remember too. For example, if you file for bankruptcy, everybody who has co-signed for you would be affected.
A debt with a co-signer that is dismissed in a bankruptcy filing may still be the co-signer’s to repay. Although you may be off the hook after you file, the lender may continue to pursue your co-signer.
A person who co-signs for a loan becomes legally accountable for the debt. It makes no difference what the principal borrower and the co-signer discuss, nor does it matter what each person’s financial status is. Regardless of a private agreement, the lender will do everything possible to collect payment, which normally entails attempting to collect from the co-signer if the principal borrower is unable to pay.
Additionally, both the principal borrower and the co-debt signer’s is reported to the credit bureau by lenders and creditors. If you’re thinking of co-signing a loan, think of yourself as a co-debtor, as you’ll be held equally accountable for the debt.
What Is A Co-Signer?
When a person, generally a friend or family member, is unable to qualify for a loan on their own, a co-signer steps in. This may be because they’re young and haven’t built up a strong and ample credit history, or maybe it’s because they’ve experienced financial troubles in the past and have poor credit because of that.
A co-signer serves as a sort of insurance policy for such a lender. They often have good credit and a steady salary. When two persons are accountable for repaying the loan, and at least one of them is a highly qualified borrower, lenders feel more confident in accepting it.
When a co-signer is engaged, lenders are more likely to give advantageous loan conditions, such as a reduced interest rate, more flexible repayment periods, and cheaper costs.
Here’s what you need to keep in mind: if you default on the loan, the lender has the right to pursue both you and your co-signer for the money. You are both equally accountable for repaying the entire loan amount.
Can A Co-Signer Be Protected?
The good news is that you CAN safeguard your co-credit signer’s record from negative marks related to your bankruptcy. Because of changes in credit reporting systems during the last decade or so, this is the case. Consumer lawsuits against the major credit reporting organizations have significantly influenced these developments.
If you declared bankruptcy in the past, your co-credit signer’s record would reflect the account as “included in bankruptcy.” Even if the account was current, this happened.
Because the conventional credit reporting system at the time allowed for credit reporting by accounts, this happened automatically. If one of the persons on the account filed for bankruptcy, the account was considered to be in bankruptcy. Everyone who was accountable on that account’s credit record reflected that the account was in bankruptcy, and the co-credit signer’s record often did not make it evident that he or she had not really declared bankruptcy.
The credit bureaus then developed and began phasing in a new system in the 1990s that allowed for credit reporting by person rather than account. This allowed the creditor to disclose that the individual on the account who had declared bankruptcy had done so, while the bankruptcy was not shown on the co-credit signer’s report. The co-report signer’s would disclose the account’s payment status, including whether or not it was current.
Consumer Data Industry Association created the new format to replace a system that was created in the late 1970s.
This new “Metro 2” format was created to help credit reporting agencies better collect data for debtor entries in their databases. The Metro 2 format improved the accuracy of debtor information, resulting in a better credit report with more capabilities for the report user.
This led to co-signers being safer when providing their signatures and credits for friends and family facing bankruptcy.
However, while the playing field was made more even it did not prevent co-signers from suffering from declining credit if they agree to assist someone get a loan and then watch them go bankrupt.
What To Remember
When you file for bankruptcy, your discharge—the court decision that clears your debt—clears you of any need to repay eligible obligations. However, your bankruptcy case solely impacts you. It will not absolve a cosigner or joint account holder of payment obligations. Here’s what to anticipate:
● If you file for Chapter 7, a creditor can continue to collect from a cosigner
● A creditor must temporarily suspend collection operations during a Chapter 13 case
● You can shield a cosigner by paying off the obligation yourself.
The automatic stay protects you from creditor collections when you file for Chapter 7 bankruptcy. However, cosigners and joint account holders aren’t protected under Chapter 7—and because creditors can’t pursue you, they’ll focus all collection efforts on them. You do, however, have alternatives. Here are some options for safeguarding cosigners and joint account holders.
By “reaffirming it” the debt—signing a new agreement with the lender—you might choose to continue accountable for it. The most frequent sort of debt that individuals reaffirm is a vehicle loan, because many people want to keep their automobile following bankruptcy.
Although confirming a debt might relieve a cosigner’s financial stress by keeping you on the hook, you’ll be foregoing the benefit of your bankruptcy discharge, which is a risky option.
Just because you’ve been discharged from bankruptcy doesn’t mean you can’t make payments on your obligations willingly. In general, continuing to make regular payments or paying off the debt in full is the best method to ensure that your cosigners and joint account holders are not harmed by your bankruptcy. Redeeming the debt—paying only the value of the acquired property—might gain you a reduction, but you’d have to bet on the creditor figuring it wasn’t worth the effort to go after the cosigner for the difference.
To speak with a bankruptcy attorney in Jasper, Tuscaloosa, or West Alabama, contact The Elmer Law Firm.