Filing for bankruptcy can provide you relief if you’re overwhelmed by debt, whether it resulted from a failed business, medical circumstances, or some other loss. When you decide to file for bankruptcy, however, you may wonder how it may affect individuals who had cosigned your loans with you. How does bankruptcy affect them, and what can you do to protect them? Read on to learn more about your options for protecting your cosigners in bankruptcy.
What Is a Cosigner?
A cosigner is a responsible party that agrees to pay off a debt if the primary borrower is unable to do so. Cosigners are often required for loans when the borrower has a limited or poor credit history, has no collateral to put up for the loan, is borrowing more than they can afford to repay, or is borrowing money for a business. A cosigner essentially takes on the same financial burden as the borrower with none of the benefits of the loan by counterbalancing a borrower’s poor credit history.
A loan can also be supported by a guarantor or someone who guarantees the loan will be repaid. A guarantor is slightly different from a cosigner in a few key ways. A cosigner faces the same responsibility for the debt as you, the borrower, and can step in to make monthly payments, whereas a guarantor is responsible for repaying the entire loan amount if payments are not made.
What Risks Do Cosigners Face?
A cosigner is not just a reference for the borrower. They are legally responsible for repaying the debt if the borrower is unable to. A cosigner can be sued for any amount owed to the creditor, and though your bankruptcy will not show up on their credit report, negative actions like missing payments or defaulting on the loan will, so it’s important to take this into account when asking someone to cosign a loan with you.
How Can Bankruptcy Protect You and Your Cosigner?
Bankruptcy can afford certain protections to cosigners and guarantors, but normally, if you declare bankruptcy, creditors can still go after a cosigner or guarantor for the remainder of the balance, even though your debt is discharged. Which type of bankruptcy you file for, Chapter 7 or Chapter 13, will dictate the protections available to your cosigner.
Chapter 7 bankruptcy gives your cosigner or guarantor little to no protection. All collection activities against you, the borrower, are stopped, but cosigners are still responsible for your debt, and creditors are allowed to continue collection against them.
There are still ways to protect them, however. You can reaffirm the debt, meaning renew your personal liability and commitment to pay back the loan, though this may only be an option if the loan is still in good standing. You can also pay off the debt by arranging a payment plan with the creditor to protect your cosigner, but only if the creditor wishes to do so.
Chapter 13 bankruptcy gives you more options for protecting your cosigner or guarantor. Chapter 13 bankruptcy allows you to consolidate outstanding debt and pay it over a longer period, either three or five years and puts a stay on any collection activities against you or your cosigner on any non-business debts. This stay can be lifted by a bankruptcy court under certain circumstances, such as the cosigner receiving some benefit from the loan.
How a Bankruptcy Lawyer Can Help
If you need help with outstanding debt or if you have questions about how bankruptcy may affect you or your cosigners, contact Telpner Peterson Law Firm, LLP, today. Our Iowa bankruptcy attorneys have the skills and experience needed to handle the most complex bankruptcy claims. Don’t let overwhelming debt determine the course of your future. Contact us today at 712-227-6842 for a free consultation.