Protecting a Loan Cosigner in Bankruptcy
People with poor or no credit often need someone else to cosign on a loan. Legally, this means the cosigner is responsible for paying any debt that is unpaid. If your mother cosigns your car loan, she’s on the hook should you default on payments.
Many of our clients have cosigners on loans and worry about how declaring for bankruptcy will affect them. This is a reasonable concern. After all, many cosigners are family members, and you don’t want to impair your relationship if you leave them high and dry with the debt. Our South Florida bankruptcy attorneys delve deeper into this issue.
Reaffirm a Debt in Chapter 7
A Chapter 7 discharge can wipe out our client’s obligation to repay a debt. However, that discharge does not affect the cosigner, who remains legally obligated unless he, too, applies for bankruptcy protection. This means the cosigner can be sued if he or she does not pay what is owed. That’s the risk of cosigning on a loan.
However, a debtor can reaffirm some debts in bankruptcy. For example, if you have a car loan, you can keep your car if you reaffirm the debt. The reaffirmed debt survives the bankruptcy, and no action will be taken against the cosigner. Discuss whether to reaffirm a debt with your Plantation bankruptcy lawyer.
What happens if the debtor doesn’t reaffirm? In that case, the creditor can come after the cosigner for whatever is unpaid. This is true even if the court discharges the primary debtor’s obligation on the debt. At that point, however, your finances might have improved so that you can repay the debt, saving your cosigner.
Pay Off a Debt in Chapter 13
Another option is to file for Chapter 13 protection. With this option, a debtor will repay certain debts using disposable income over the course of three to five years. Only at the completion of the repayment plan does the court discharge unpaid debts.
A cosigner can garner the protection of the automatic stay, which is in place for as long as the debtor follows the repayment plan. In some cases, the stay is in place for up to 5 years, so your cosigner will not face any collection action for a long time. However, as a debtor, you need to stick to your plan. If you stop making payments, your creditors can ask the judge to dismiss your case and you lose bankruptcy protections.
To fully protect a cosigner, the repayment plan needs to have provisions for paying the debt in full. If not, then the creditor will probably ask the court to lift the stay so they can take immediate collection action.
Contact Nowack & Olson to Learn More
The presence of cosigners presents some unique wrinkles regarding whether to file for bankruptcy. At our firm, our Plantation bankruptcy attorneys help our clients think through all the consequences of filing, including how bankruptcy will affect their loved ones. Please contact us at Nowack & Olson, PLLC today to schedule a free consultation by calling 888-813-4737.