What If You Cosigned a Borrower in Bankruptcy?

How bankruptcy affects you as a cosigner.

When you cosign on a loan or a line of credit for a friend, associate or family member, you assume a certain amount of risk. So if things go south, then you’ve obligated yourself to be on the hook for the balance owed. The creditor or third-party collector can legally go after you, too.

But what happens if the borrower file for bankruptcy? How will this affect? The information below helps you understand how personal bankruptcy petitions by someone else can affect you as a cosigner. If you still have questions, you should talk to a licensed attorney in your state. We can connect you with the right expert for your needs. Call us or complete the form to the right to get started.

You’re on the hook for the balance

The short answer is that even once a debt is discharged through a personal bankruptcy filing through the court, the collector can pursue a cosigner for the outstanding balance. The only way you can get out of this is if the primary borrower agrees to repay the balance in full.

So if the person you cosigned for files for bankruptcy, you need to talk to them! You have to make sure they handle the debt that has your name on it, so you’re not left to pay off their debt once they’re free and clear.

Chapter 13 is slightly better for cosigners

During bankruptcy according to the BAPCPA, borrowers get what is known as an automatic stay on any debt included in the petition. This means creditors and collectors must cease all attempts to collect from the borrower.

With a Chapter 13 bankruptcy filing, the automatic stay extends to cosigners, too. Keep in mind that the balanced is still owed, but collections can’t be pursued, which is why it’s better for you because creditors can’t harass you while the borrower goes through the bankruptcy process.

But during the repayment plan structuring, the borrower needs to agree to pay off the debt you cosigned in full. Otherwise, the collector can come after you for the remaining balance owed. In fact, if the borrower’s repayment plan doesn’t say they’re repaying the debt in full, the collector can petition the court to lift the automatic stay so they can pursue you even before the bankruptcy is complete.

Chapter 7 means no automatic stay

If the borrower files for Chapter 7 bankruptcy, then cosigners aren’t protected by the borrower’s automatic stay. In fact, a collector may start coming after you once a borrower files if they haven’t already.

The only two ways to get out of it are:

  1. If the borrower reaffirms the debt – meaning they take it off the table for discharge and agree to repay that particular debt in full.
  2. If even after discharge, the borrower repays the remaining balance. There is no law against repaying a debt in-full even if it was discharged.

So again, you are only off the hook if your friend or family member agrees to be on the hook.