A reader worries his stepdaughter’s decision to file for bankruptcy will ruin his chance of getting a good rate on his mortgage.
My wife and I married in 2017, both of us for the second time. She has a daughter who graduated from college last spring. Under pressure from my wife, I co-signed on $9,000 of private student loans and a $12,000 auto loan.
Even before the pandemic, my step-daughter had problems making her payments. Now she wants to declare bankruptcy, blaming the shutdown for her company furloughing employees for one week out of the month.
Besides these loans I’ve co-signed, she says she has almost $20,000 in credit card balances she can’t pay. (I never knew she was carrying such big balances.) The total debt is more than a year’s salary.
Besides being worried about her, I’m worried about me. What happens to me as a co-signer on those two loans? I know bankruptcy ruins your credit score. Will it also ruin mine? The wife and I want to buy a new house since interest rates are so low right now. But will that be possible if it looks like I declared bankruptcy?
Will mortgage companies think I’m a bad risk because I co-signed on loans that later went into bankruptcy? Will they think I’m a poor judge of character?
I’ve tried Googling this and I don’t come up with a clear answer. Can you help?
– Dan in Ohio
Gerri Detweiler, Credit Expert, responds…
Unfortunately, as a cosigner, your stepdaughter’s financial problems have become yours. As you probably know, when you cosign you agree to be fully responsible for the debt if the primary borrower doesn’t pay. Your daughter’s bankruptcy will not eliminate your responsibility for either loan and lenders rarely just let cosigners off the hook.
How a cosigner’s credit is affected by debt and bankruptcy
If your daughter stops making payments on either debt, late payments may be reflected on your credit reports because you are a cosigner. Recent late payments will likely drop your credit scores significantly and will make it more difficult (and expensive) to get a home loan in the near future. Mortgage rates are very credit score driven so any drops in your scores could mean a higher rate, or may even disqualify you from certain loan programs.
If you continue to pay those loans and there are no late payments, generally your credit scores should not be impacted. However, it is possible that the debt included in the bankruptcy will be listed as “included in bankruptcy” on your credit reports. Generally, though, a non-filing cosigner can dispute that notation with the credit reporting agencies and request it be removed. (That approach won’t remove late payments, though, so you can’t simply walk away from the debt and protect your own credit.)
You mentioned your stepdaughter has had problems paying in the past. Have you checked your credit reports to see if any late payments have been reported? If not, you can get your reports from Equifax, Experian, and TransUnion at AnnualCreditReport.com, the federally mandated source for free credit reports. In addition, there are more than 138 places where you can monitor your credit scores for free.
Things to consider before the bankruptcy filing
To evaluate your next steps, it’s important to understand exactly what approach your stepdaughter will take with her bankruptcy.
Student loans can be complicated and expensive to discharge in bankruptcy, so it may be she and her attorney are not going to try to discharge hers. If that’s the case, you will want to make sure the payments continue to be paid on time. Ensure you can access the account online so you can monitor payments each month. If she plans to try to discharge her student loan in bankruptcy, you’ll need to find out whether it makes sense to step in and make the payments.
Similarly, if your stepdaughter wants to keep her car to get to work, she may not be planning to include it in her bankruptcy. As with the student loan, if that’s the case you’ll want to make sure the payments are made on time going forward. If she is going to try to include the auto loan in bankruptcy, perhaps you can convince her to sell the vehicle and apply the proceeds toward the balance. Then you and your wife could cover the remaining balance (assuming the car is worth less than she owes) so no negative information appears on your credit reports.
Alternatives to consider
It may be her primary goal in filing for bankruptcy is to eliminate her credit card debt. If so, you may want to help her understand that she may have alternatives. She may be able to repay that debt with the help of a credit counseling agency, which will have the least impact on her credit. Or she may be able to work with a debt settlement company to resolve the debt by paying less than the full balance without filing for bankruptcy. Regardless, if you or your wife are not a cosigner for her credit cards, they should not impact you or your wife’s credit reports or scores.
Regardless, it sounds like your next step is to get more specific details about her plans in filing for bankruptcy. Ask to join her in a consultation with her attorney to learn what the plan is for the debts you have co-signed. It may also make sense for you to consult your own consumer law attorney to find out how to best protect yourself.
Connect with experts who can make sure you’re ready to file.
Published by Debt.com, LLC