Facing financial hardship and contemplating bankruptcy can be a daunting journey. This is a very common concern. If a friend or family member cosigned a loan for you, it’s natural to worry about how your bankruptcy might affect them. However, the impact on your cosigner is often not as severe as many fear, and it certainly shouldn’t stop you from taking necessary steps to regain your financial footing—with the guidance of an experienced bankruptcy attorney. At Bankruptcy LawChicago.com, we have been helping people solve their financial problems and providing “Peace of Mind” for over 30 years.
The Basics: What Happens to a Cosigner When You File for Bankruptcy?
When you file for bankruptcy, your goal is to gain relief from overwhelming debt. Depending on whether you file under Chapter 7 or Chapter 13, the way your debts are handled can vary. For loans that involve a cosigner, here’s what typically happens:
Your Bankruptcy Does Not Appear on Their Credit Report:
First and foremost, your cosigner’s credit report will not reflect your bankruptcy. Bankruptcy filings are personal to the individual who files and are not shared across credit profiles. This means your decision to seek bankruptcy protection won’t directly tarnish their credit history.
Payment History Matters More
The primary concern for a cosigner is the payment history on the cosigned debt. If payments were missed or halted before or during the bankruptcy process, those missed payments can impact the cosigner’s credit. However, if the debt continues to be paid on time—by either you or your cosigner—their credit will remain in good standing.
Chapter 13’s Co-Debtor Stay Protects the Cosigner
In a Chapter 13 bankruptcy, a “co-debtor stay” can protect your cosigner from collection actions while you follow a repayment plan. This can provide valuable breathing room, ensuring creditors cannot pursue your cosigner while the court oversees your case.
Cosigner Responsibility for the Debt: Even if your bankruptcy discharges your personal obligation to repay the debt, this discharge does not eliminate the cosigner’s responsibility for the loan. The lender still has the legal right to collect from your cosigner if payments are not made. However, this responsibility is no different than what the cosigner agreed to when signing the loan.
Why the Effects Are Manageable with the Right Support
While it’s true that bankruptcy can create challenges for a cosigner, those challenges are often manageable with proper planning. Here’s why:
Communication Is Key: Open and honest communication with your cosigner before filing can help set expectations and create a plan for how the debt will be handled moving forward.
Legal Guidance Makes a Difference: An experienced bankruptcy attorney can help you and your cosigner explore options, negotiate with creditors, and find solutions that minimize financial strain.
Bankruptcy Provides a Fresh Start: Remember, the primary purpose of bankruptcy is to give you a fresh start. By eliminating overwhelming debt, you can focus on rebuilding your financial future—ultimately reducing the risk of financial strain for both you and your cosigner.
When you contact us, you get our knowledge and experience, and compassionate guidance to help you on the path that is best for you and your family.
Call or email us to schedule an in-depth consultation, or just to ask a few questions. We can help!
Daniel J. Winter
BankruptcyLawChicago.com
