Most of us tend to keep our finances private and make financial decisions on our own. But if you’re considering bankruptcy and have debts with cosigners, they will need to be informed of the status of your finances because they could be affected.
Using a Cosigner
If you’re just starting out or have a low credit score, you may need to have a cosigner in order to qualify for a loan. A cosigner agrees to be responsible for your debt if you default on a loan or other debt. As soon as you file any chapter of bankruptcy, the automatic stay begins, which means your creditors can no longer pursue collection of your debt. When you file bankruptcy, you may be released from the responsibility of your debt, but your cosigner may still need to pay the remaining balance.
If you choose to file a Chapter 7, your debt may be discharged, but your creditors will do everything within their power to collect what they’re owed, including contacting your cosigners, but there may be some things you can do to protect them. After your Chapter 7 has discharged your unsecured Debts (which do not have cosigners), you may have enough room in your budget to keep up with your secured debts. You’ll need to “reaffirm” these debts, putting them in your name alone. You and your cosigner may also agree to keep the debt in their name, while you make the actual payments on their behalf. This won’t immediately get rid of your debt and can be risky for them, but will eliminate possible damage to your relationship if you can stay good to your word of making the payments.
Some people with cosigners decide to file a Chapter 13, even if the means tests allows them to file a Chapter 7. Any secured debts that you have will be included in your 3-5 year repayment plan, and your cosigners will not need to be involved. They would fall under the “codebtor stay” which is similar to the automatic stay, but applied to a cosigner. If a certain debt is not taken care of during your repayment plan or if the creditor legally requires immediate payment, they may ask the court trustee to lift the stay; in this situation, your co debtor would need to pay your debt for you. This also applies if you convert to a chapter 7 or have your case dismissed.
Time for a Heart to Heart
You may need to borrow money for a car, home, or education, but if you don’t have a great credit score, you could either be denied credit or be forced to pay a very high interest rate. Using a cosigner for your loan may be an option, but your family member or friend needs to understand that they may be responsible for your debt if the unexpected happens. Before agreeing to a loan with a cosigner, it’s important to have some honest conversations about the possible consequences. If you’re worried about what filing bankruptcy might mean for you and your loved ones, give me a call so that we can explore your various options.