What’s the Effect of Your Loan’s Co-signer Filing for Bankruptcy?

People who have difficulty borrowing money often get a friend or relative to be a co-signer on a loan. The co-signer is in effect a guarantor who is secondarily liable for the debt until it is paid in full. However, the situation changes if the co-signer files for bankruptcy.

When a co-signer declares bankruptcy, it results in an automatic stay that prohibits creditors from trying to collect on the co-signer’s debts. But the automatic stay protects only the co-signer. You, as the principal borrower, are still subject to debt collection efforts. As long as you are making payments on time, there usually will be no actions taken. However, in some loan agreements, a co-signer’s declaring bankruptcy is considered a loan default. This makes the entire loan balance due and payable immediately, which is called acceleration of the debt.

A lender is not required to enforce such default provisions. Often, it is not in a lender’s best interests to accelerate the loan. If the co-signer’s obligation is discharged in bankruptcy, the lender cannot recover from the co-signer. A declaration of default when you are making timely payments only jeopardizes the lender’s financial interests, since you are unlikely to have the funds available to pay the entire balance. However, if the creditor opts to accelerate, you may be place in a position of seeking debt relief.

If the co-signed loan is secured by collateral, the property is not jeopardized by the co-signer filing for bankruptcy unless the co-signer is a part owner. The bankruptcy trustee can seize a debtor’s assets to pay off certain debts. However, if the co-signer has no ownership interest, the trustee cannot seize the property.

After a co-signer goes into bankruptcy, it may also be possible for you to refinance the existing loan without a co-signer or with a different co-signer. An experienced bankruptcy attorney can explain the options available.

In most cases, your biggest issue with a co-signer’s filing for bankruptcy is the potential effect on your credit rating. The loan may show up as being in default or bankruptcy. The loan information on the credit report might be a problem if you want to take out another loan in the future. This issue can often be rectified with a letter of explanation to the reporting agencies. The credit report should indicate that you have not filed for bankruptcy.

Jeff Field & Associates, with offices in Atlanta, Marietta and Athens, is one of the most active bankruptcy and debt relief law firms practicing in those regions of Georgia. Feel free to contact us online or call 404-381-1278 for a free initial consultation.