Cosigners and Bankruptcy

Cosigners typically have stronger credit than the primary borrower, and so their signature on lending papers can help the primary borrower get a better loan. A cosigner also takes responsibility to pay the debt if the primary borrower fails to pay. If you are going to file for bankruptcy, it’s important to understand how all parties involved in your finances will be affected, including any cosigners you may share a loan with.

Depending on which chapter bankruptcy you file (chapter 7 or chapter 13), cosigners may be affected differently. If you file a Chapter 7 bankruptcy, most debts are completely discharged, which means you are not responsible for payment. However, your cosigner is still responsible for making payments. If you file a Chapter 13 bankruptcy, you will be responsible for making payments according to the terms outlined in your repayment plan. As long as you make payments according to your chapter 13 schedule, your cosigners are not responsible for paying your debt.

But bottom line: any payment you fail to pay or pay late will damage both you and your cosigner’s credit. If you have a cosigner in a business loan, they are not at all protected by bankruptcy filings.

Because in many cases cosigners are close friends or relatives that have offered a helping hand, it can be very difficult to know that your bankruptcy filing will likely negatively affect them. While it is a very unfortunate consequence of bankruptcy, you need to make sure you decide which chapter of personal bankruptcy to file by choosing the one that will work best for you. Your cosigner did take on significant legal responsibility and personal risk by signing the lending papers and should understand the consequences.

Before filing, I strongly suggest speaking with a bankruptcy attorney who can help you identify the best direction to take and who can make sure that your best interests come first.