Cosigning on loans is very common.
Friends and family members often agree to guarantee / cosign on debts. This includes vehicle loans, student loans, mortgages, and other debts in order to enable someone with less than perfect credit or income to qualify for the loan.
Cosigning or guaranteeing a debt has the same level of liability as being the primary borrower: You are liable for all the payments due under the contract.
Therefore, filing a bankruptcy neither increases not decreases a cosigner’s liability on a debt.
Does Filing Bankruptcy Eliminate A Cosigner’s Obligations On The Debt?
No. This is a misconception many hold.
Bankruptcy only affects the rights and obligations of the party filing the bankruptcy case.
Unless the cosigner files their own bankruptcy case, they are just as liable for the debt after the primary borrower files a bankruptcy.
This can often come as a rude surprise to the cosigner who was unaware of the delinquency.
If the loan calls for regular monthly payments, the cosigner should be made aware before any payments are missed, so they have the opportunity to step in and make the payments so their credit is not affected.
This is not always a pleasant conversation to have.
But it is better than the cosigner being served with a lawsuit for the full amount owed.
Can A Cosigner Continue Payments on Debts Without Affecting Their Credit?
This depends on whether the underlying loan/debt is in default or not. If the payments are current then the cosigner can simply “take over” making the payments. The lender will not care and there should not be any negative impact to the cosigner’s credit.
However, if the loan is in default, then the cosigner must get the loan out of default and then resume the monthly payments or payoff the loan in full.
The Codebtor Stay in Chapter 13 Protects Cosigners On Consumer Debt
If any portion of the debt in question is a “consumer debt”, then if a Chapter 13 case is filed, any codebtor (cosigner) on the debt is protected by the bankruptcy “automatic stay”. As long as the bankruptcy case is open and the stay remains in place.
The purpose of this is to give the person filing the Chapter 13 time to make payments on the debt.
Once a Chapter 13 is filed, creditors are prohibited from taking any collection action against both the person filing the Chapter 13 case AND the cosigner who did not file bankruptcy on any consumer debt.
Consumer debt is defined as “debt incurred by an individual primarily for a personal, family, or household purpose.” [11 U.S.C. 101(9)].
Creditors can seek bankruptcy court permission to “lift” the stay to allow them to seek collection against a codebtor during the bankruptcy, but in most cases this does not happen.
Thus, Chapter 13 is often a good way to deal with debts owed when there is a cosigner.