Filing for bankruptcy can be a complex and emotional decision. It is even more complicated when someone has co-signed a loan with you. If you have loans with co-signers, it’s important to know how your bankruptcy will impact them.
Understanding co-signer responsibilities
When someone co-signs a loan, they agree to pay back the debt if you, the primary borrower, default on it. If you stop making payments, the co-signer is legally obligated to pay the balance. This responsibility does not go away simply because you file for bankruptcy.
Impact of Chapter 7 bankruptcy
If you file for Chapter 7 bankruptcy, the court may discharge your eligible debts. This means you are no longer legally required to pay them. However, this discharge only applies to you. Your co-signer is still responsible for the debt.
Impact of Chapter 13 bankruptcy
Chapter 13 bankruptcy works differently. In this type of bankruptcy, you create a repayment plan to pay off your debts over three to five years. During this period, creditors are generally prohibited from pursuing your co-signers for payment. However, this only happens as long as you make the agreed-upon payments.
Protecting your co-signers
There are a few ways to protect your co-signers when you file for bankruptcy.
In Chapter 7 bankruptcy, you can reaffirm the debt. This means you agree to continue making payments despite the bankruptcy. This keeps them out of your bankruptcy discharge and prevents the creditor from pursuing your co-signer. Another option is paying off the co-signed debt before filing for bankruptcy. This protects your co-signer from any fallout.
In Chapter 13 bankruptcy, including the co-signed debt in your repayment plan can help. This prevents creditors from going after your co-signer as long as you adhere to the repayment schedule.
Consequences for co-signers
If you file for bankruptcy, your co-signer might face several consequences:
- Credit score impact: If they are unable to pay the debt or if it goes into collections their credit will take a significant hit.
- Financial strain: They might experience financial hardship when making payments on your behalf.
- Legal action: Creditors can take legal action against co-signers to recover the debt. This could lead to wage garnishment or other legal consequences.
Communicating with your co-signer
While filing for bankruptcy can be beneficial, it has implications for your co-signers. Open and honest communication with them is crucial. Explain your situation and the steps you are taking to manage your debts. Understanding the implications of your choice can help you protect your co-signers. This not only addresses the current situation but also strengthens trust and cooperation for the future.
