When a person co-signs for a loan they agree to pay the debt if the borrower isn’t able to make the payments. The reason why a co-signer is required is because the lending institution doesn’t have full faith, based on their analysis of the borrower’s finances, that the borrower will be able to repay the loan.
If the borrower you co-signed for is going to file for bankruptcy, then you are responsible for the debt and perhaps more.
A co-signer is obligated to pay any missed payments, and even the full amount of the loan, if a borrower doesn’t pay, and the co-signer’s credit can be harmed if the borrower doesn’t make payments or is late in making payments.1 That is why it is important that you and your potential co-signer are knowledgeable about the risks involved in co-signing any loan.
The Co-Signer is Responsible
The Federal Trade Commission requires that lenders provide your co-signer with a document called a Notice to Cosigner, which details the responsibilities and pitfalls of co-signing a loan. It informs the co-signer that in addition to possibly having to pay the debt in full they may also have to pay late fees and/or collection costs.2
It also informs the co-signer that if the borrower defaults on the loan the creditor can use the same collection methods as they can legally use with the borrower, which can include suing the co-signer and garnishing the co-signer’s wages. Depending on each state’s laws the lender / collection agency may have to try to collect from the borrower before they attempt to collect from the co-signer.
Collecting from the Co-Signer
In some states, for example, the state laws allow the lender to go after the co-signer without first attempting to collect from the borrower.3 The Notice to Cosigner also states that any default on the debt can become part of the co-signers credit record. So, make sure to understand the cosigner laws in Massachusetts before committing.
A co-signer should also understand that they have no rights to the item being purchased by the loan for which they have co-signed. So, even though they may have to make payments on the loan, or may be required to pay the loan off in full, the co-signer has no title, ownership, or other rights to the property.4 In some states, the laws require that a co-signer be sent a notice when the borrower becomes delinquent or has defaulted on their loan and the co-signer is given time to respond to the lender either by making a payment or making payment arrangements.5
Co-Signer and Bankruptcy
If a person files for Chapter 7 bankruptcy protection, any co-signers on their loans will still be responsible for payment of those loans.6 While the debtor is protected against creditor collections by an automatic stay, the co-signer is not, so in most cases collection agencies will direct their collection efforts toward your co-signer.
If a person files for Chapter 13 bankruptcy protection and is paying off their debt per a Chapter 13 repayment plan, a lender must temporarily stop collection proceedings against both the borrower and the co-signer for all consumer (non-business) debts. The creditor, however, can go to court and obtain permission to lift the stay if several situations exist, for example, if the co-signer is driving the vehicle purchased on the loan they co-signed.
It is advisable to discuss how filing for bankruptcy will affect co-signers in your particular situation, as there are many variables to consider. Financially harming someone who agreed to help you by co-signing a loan is a highly emotional situation and your bankruptcy attorney can help you navigate through these tough decisions and conversations with your co-signer.
Filing for personal bankruptcy can be complicated, hard to understand for most people. An experienced and trusted bankruptcy attorney will make a difference and help you navigate the process. Hines Law is a leading Bankruptcy Firm in Massachusetts provides knowledgeable legal counsel with compassion that will lay the groundwork for a better financial future.
Our bankruptcy lawyers are competent, attentive, and ready to fight for your best interest. If you are overwhelmed with debt and have questions about how and if bankruptcy will help, contact us for a Free Consultation!
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1 What is a Co-Signer, 6/23/2021
Link: https://www.consumerfinance.gov/ask-cfpb/what-is-a-co-signer-en-745/
2.4 Cosigning a Loan FAQs
Link: https://www.consumer.ftc.gov/articles/cosigning-loan-faqs#HowDoIKnow
3,5 Cosigning a Loan? Know the Risks!
https://search.mass.gov/?_ga=2.203989072.1167704955.1645804457-1395647684.1645804457&q=cosigners%20and%20loans&page=1
6 What Happens to My Cosigner in Chapter 7 Bankruptcy? by Cara O’Neill
Link: https://www.thebankruptcysite.org/resources/bankruptcy/chapter-7/cosigner.htm