When bankruptcy includes a co-signed loan, it can create complications for both parties involved. Understanding how this affects a co-signer is crucial to protecting their financial interests.
Responsibility of the co-signer
A co-signer agrees to take on responsibility for the loan if the borrower defaults. Filing for bankruptcy does not release the co-signer from this obligation. If the primary borrower’s debt is discharged through bankruptcy, the lender may pursue the co-signer for the remaining balance.
Protection for co-signers in Chapter 13 bankruptcy
Chapter 13 bankruptcy can offer some protection for co-signers. In this type of bankruptcy, the borrower repays the debt through a structured repayment plan, which may shield the co-signer from immediate collection efforts. However, this protection only lasts as long as the borrower continues to make payments under the bankruptcy plan.
Impact of Chapter 7 bankruptcy on co-signers
In Chapter 7 bankruptcy, the court discharges debts without a repayment plan. When a borrower’s debts are eliminated, the co-signer becomes fully responsible for the loan. Lenders can pursue the co-signer to recover any remaining debt, as the borrower no longer holds financial responsibility.
Options for co-signers
Co-signers have limited options if the borrower files for bankruptcy. They may choose to pay off the loan to avoid damage to their credit score or negotiate with the lender for a settlement or payment plan. Seeking legal advice can help to protect their financial situation.
Understanding the risks associated with co-signing a loan is essential before entering into such an agreement, particularly when bankruptcy may be a possibility.
