Bankruptcy can be a scary but necessary next step toward financial freedom and starting over with a clean slate. But how does it affect someone who has cosigned on your loan? The best way to navigate this decision is to contact an experienced bankruptcy attorney who can help you make the best decision for you and your co-signer. Keep reading to learn all you need about loans, co-signers, and bankruptcy.
When Do You Need a Co-signer
A co-signer is a family member or close friend who agrees to pay your loan if you fail to do so. Those who do not have credit or don’t meet income requirements may require a co-signer for their loan. The most common example is when a parent cosigns a lease for their child, promising to pay rent if their child cannot. In some instances, having a co-signer can help reduce loan rates. Anyone applying for student loans, a car loan, or even a mortgage may require or benefit from a co-signer.
How Bankruptcy Affects Co-signers
Filing for bankruptcy can drastically affect a co-signer and their financials, depending on the type of bankruptcy filed. Under Chapter 7 bankruptcy, the co-signer may still be responsible for paying off the full debt, even if the borrower is absolved from their obligations. If the loan is not repaid on time, the co-signers’ credit score could be affected. Under Chapter 13, the borrower creates a repayment plan over 3 -5 years, and co-signers are protected by the “co-debtor stay”. This prevents creditors from contacting the co-signer for repayment. If the borrower does not adhere to their repayment plan, creditors can contact the co-signer. The “co-debtor stay” may not cover some types of debt, including student loans.
How to Protect Co-signers
To protect your co-signer on a loan, it is important to have an open and honest conversation about your financial situation ahead of time. This way, your co-signer knows exactly what to expect, and can prepare for the next steps. We also encourage you to discuss with your attorney how bankruptcy will affect your co-signer, and how to protect them when filing. If possible, consolidating your loans under your name alone will protect your co-signer from any future financial issues.
When to Contact an Attorney
When you can no longer repay your loan, it may be time to contact a professional. A bankruptcy attorney can help determine if filing for bankruptcy is right for you. They can review your options, offer advice, and assist you with the next steps.
Contact Craft Law Office today for a free consultation to review your situation with a professional. Leslie Craft has over 30 years of experience assisting clients with financial and legal issues. Trust that your case will be met with transparency and dedication to help you get a fresh financial start.