What Happens To a Cosigner If You File For Bankruptcy?

How Bankruptcy Affects Your Cosigner: Key Insights For Borrowers In Hawaii

When you apply for a loan, especially if it is your first time, you may have to find someone who is willing to cosign. Your cosigner will be equally responsible for your debt and if you file for bankruptcy, they will most certainly be affected. Before filing, if you have a cosigner involved, you should ask a few questions.

What happens if you choose to file for bankruptcy? How will your bankruptcy affect your cosigner? Is there anything that can be done to protect your cosigner? These are all important questions that must be answered and your bankruptcy lawyer can help you determine the best course of action.

What Happens To Cosigned Debt During Hawaii Bankruptcy?

If you are considering bankruptcy, it’s important to consider all aspects of how it will affect you and anyone who cosigned a loan with you. Your Honolulu bankruptcy lawyer can help you understand your specific situation and whether bankruptcy is right. But how will bankruptcy affect your cosigner? The answer lies within what type of bankruptcy you file for.

Chapter 7 Bankruptcy & a Cosigned Loan

In Chapter 7 bankruptcy, all your non-exempt assets will be sold in order to pay off debts. Anything unsecured will usually be discharged. As the borrower filing for bankruptcy, your obligation to pay your debt will be wiped out at the end of bankruptcy.

Chapter 7 bankruptcy does not have the same benefit for the cosigner, unfortunately. They will remain liable for the full debt amount. As soon as the borrower’s bankruptcy case is complete, the cosigner is fully and legally responsible.

A Cosigned Loan & Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, the bankruptcy filer’s loan is reorganized into a 3-5 year payment plan. An automatic stay is placed on the debt which prevents any collection efforts until the bankruptcy is complete. This stay impacts the cosigner as well. As long as the borrower continues paying off the loan, the cosigner will not be responsible.

Once the payment plan is complete, some or all of the debt may be paid off which will reduce or eliminate what the cosigner owes. However, if the borrower does not complete the bankruptcy plan, the automatic stay will go away and the lender can pursue the cosigner immediately.

What Is a Cosigner & How Do They Affect Hawaii Bankruptcy Cases?

A cosigner is often required for those who are first-time borrowers or who have poor credit history. It is typically a person who is agreeing to take on joint responsibility for paying the loan if the original borrower fails to do so. The loan will appear on the cosigner’s credit report and timely or missed payments will affect their credit score.

The lender will take a look at the cosigner’s income, credit score, and assets to determine whether to initiate the loan. Being a cosigner means some risk such as being legally responsible for the loan if the original borrower cannot pay. Lenders can even pursue cosigners for missed monthly payments. And if the original borrower files for bankruptcy, the cosigner will be impacted.

What If Your Cosigner Files For Bankruptcy In Hawaii?

What happens if, in a turn of events, your cosigner files for bankruptcy? As the original borrower, you will continue to be 100% liable for the loan. If your cosigner files for bankruptcy, their obligation to pay your loan could be discharged and the lender will no longer be able to pursue them if you do not pay.

You will continue to be pursued for the loan, however. Additionally, the benefits of your cosigner’s credit score could be removed such as the more favorable terms. The cosigner’s bankruptcy will not affect your credit score, but any missed payments by yourself or your cosigner will reduce your personal credit score.

Ways To Protect a Cosigner When Filing For Bankruptcy

So how can you safeguard your cosigner if you choose to file for bankruptcy? The best way to do this is to file for Chapter 13 instead of Chapter 7, if at all possible. As stated above, this places an automatic stay on the debt for you and your cosigner and if you follow the payment plan of Chapter 13, your debt will likely be completed at the end of bankruptcy removing your cosigner’s responsibility.

You could also talk with your bankruptcy lawyer to see if reaffirming the cosigned debt is possible. You must sign a reaffirmation agreement before your debt is discharged in order to do this. This signals to the lenders that you intend to continue paying off the debt once your bankruptcy is over. It keeps the debt alive in your name and prevents your cosigner from being left with the bill.

Protect Your Cosigner & File For Bankruptcy With Confidence By Contacting Our Trusted Bankruptcy Lawyers

At Blake Goodman, we have over 80 years of combined experience and are dedicated to walking our clients through the challenges of bankruptcy. Whether you’re filing for Chapter 7, Chapter 13, or want ideas on how to avoid bankruptcy, our Honolulu bankruptcy lawyers have you covered. We provide a free consultation where we will evaluate your case and discuss your options.

Contact us today to start on your journey towards financial freedom and protect your cosigner while doing so.