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Life in California is expensive and it’s tough to get credit. Having a cosigner or guarantor can make life a lot easier. Maybe your parents cosigned your auto loan. Maybe you cosigned a mortgage loan with your spouse. Now you’re considering filing for bankruptcy. How will your filing affect your cosigner?
Below, we’ll go over the following:
- What is a cosigner?
- What happens to your cosigner’s debt if you file for bankruptcy?
- What happens to your cosigner’s credit score?
- What happens if your cosigner is the one to file for bankruptcy?
What is a cosigner?
A cosigner is someone who agrees to be legally bound to repay a loan if the primary borrower can’t pay. Lenders may require cosigners for borrowers with no credit history, bad credit, or low income. They have a better chance of collecting on a loan backed by someone creditworthy.
Cosigners are different from guarantors, but the exact rights and obligations depend on the loan documents and applicable state law. A cosigner is usually directly responsible for the debt, while a guarantor promises to pay if the borrower does not. Some guaranties let a creditor seek payment from the guarantor without first exhausting collection against the borrower, so read the agreement carefully. For bankruptcy purposes, the key issue is whether the other person is legally liable with you on the debt or has secured the debt; if so, your bankruptcy discharge generally does not wipe out that person’s separate liability.
What happens to my co-borrowed debt when I file for bankruptcy?
After you complete a bankruptcy case in California, many qualifying unsecured debts may be discharged, meaning you are no longer personally obligated to repay those debts. But not every unsecured debt is dischargeable, and a bankruptcy discharge does not extend to a cosigner, co-borrower, or guarantor. Under 11 U.S.C. § 524(e), the discharge of your debt generally does not affect another person’s liability on that same debt. This is important to understand before asking someone to be a co-signer or guarantor: they should know that they may remain responsible even if your personal liability is discharged.
Cosigners and Guarantors in Bankruptcy
The effect of your bankruptcy on your co-borrower depends in part on the type of bankruptcy you’re filing. Under both Chapter 7 and Chapter 13, you get the protection of the automatic stay when you file. The automatic stay prevents creditors from trying to collect from you. Your co-borrower, on the other hand, may not receive the same protection.
Cosigners and Chapter 7
Under Chapter 7, the automatic stay generally protects you and property of your bankruptcy estate, but it does not automatically protect cosigners and guarantors. A creditor usually may seek payment from a non-filing cosigner or guarantor, as long as it does not violate the stay or discharge injunction by trying to collect from you personally. Practically, for the co-borrower, it can feel similar to a default on the loan.
How can I protect a co-borrower?
First, notify the co-borrower before any payment is missed so they can decide whether to keep the account current. Banks may not notify a cosigner or guarantor right away when a payment has been missed, and missed payments can affect both credit reports and open the door for repossession, foreclosure, and lawsuits. If the co-borrower wants to take over the loan, they may need the lender’s written approval, a refinance, or another formal assumption; your bankruptcy schedules alone do not remove you from the contract or make the co-borrower the only party to the loan.
If your co-borrower doesn’t want to take over the loan, you may be able to reaffirm it. Reaffirming a debt is a serious decision for a bankruptcy filer because you agree that your personal liability for that debt will not be discharged in the current Chapter 7 case. The court may require specific disclosures or approval, and you should only reaffirm if you can afford the payments and understand the risk. If you reaffirm and later default, both you and your cosigner or guarantor may remain liable under the loan documents.
Finally, you can choose to continue to make the payments through your co-borrower throughout and after your bankruptcy. You won’t be legally liable for the debt, but you may volunteer to pay.
Cosigners and Chapter 13
Under Chapter 13, co-borrowers may get much greater protection. When you create your Chapter 13 payment plan, you can include cosigned consumer debt and continue to make payments through the plan or directly, depending on the debt and plan terms. Chapter 13 also includes a special protection for individuals who are liable with you on consumer debts. This is separate from the ordinary automatic stay and is commonly called the “co-debtor stay.”
Creditors may request that the court lift the stay in several circumstances, including when the non-filing co-borrower actually received the benefit of the loan, when the Chapter 13 plan does not propose to pay the claim, or when the creditor’s interest would be irreparably harmed. The co-debtor stay generally applies only to consumer debts and only while the Chapter 13 case remains active, unless the court orders otherwise.
If you file under Chapter 13, your co-borrower is usually best protected when the plan keeps the cosigned debt current or pays it in full. If plan payments are missed, the creditor may seek court permission to collect from the co-borrower, and the co-borrower can remain liable for any unpaid balance after the stay ends. If the debt is fully paid through the plan, the co-borrower should not owe anything further on that debt.
Some debts can extend beyond a Chapter 13 bankruptcy, including long-term secured debts such as mortgage loans, debts that are not dischargeable, debts not fully paid through the plan, and any debt for which a co-borrower remains separately liable. If your case is dismissed, closed, or converted, creditors may be able to resume collection from the co-borrower, subject to any applicable nonbankruptcy law.
What happens to my cosigner’s credit score if I file for bankruptcy?
When you file for bankruptcy, your credit score will usually be affected, but the exact change depends on your credit profile, your payment history, and the type of bankruptcy. The same is not necessarily true for your co-borrower. As long as the creditor continues to receive the required loan payments and reports the account as current, your co-borrower’s credit score may not take a direct hit from your filing. To the lender, the key issue is whether the account is paid as agreed, not whether you or your cosigner makes the payment.
The fact that one party files for bankruptcy does not automatically make the cosigner less creditworthy. However, creditors and credit bureaus may report the account in different ways, and some reports may show that the account is associated with a bankruptcy even though the cosigner did not file. The non-filing cosigner should review their credit reports and dispute any inaccurate reporting.
If you miss payments on the account, your cosigner’s credit score can suffer because the same account and payment history often appear on both credit reports. A late payment, default, repossession, foreclosure, or collection action can affect both the borrower and the cosigner.
What if my guarantor or cosigner files for bankruptcy?
When you file for bankruptcy, it affects your cosigner or guarantor. The inverse is also true — if your cosigner or guarantor files for bankruptcy, it may affect you.
In some cases, a guarantor’s or cosigner’s bankruptcy could create issues with the loan, especially if the loan agreement gives the lender rights when a cosigner can no longer pay. However, for private education loans covered by federal law, a creditor generally may not declare the student borrower in default or accelerate the debt solely because a cosigner dies or files for bankruptcy. If you have a private student loan, review the loan agreement, contact the lender or servicer, and ask whether the cosigner can be released, replaced, or removed through refinancing.
If your guarantor or cosigner is planning to file for bankruptcy, contact the lender or servicer before problems arise. Depending on the loan type and your payment history, you may be able to request a cosigner release, refinance in your own name, provide a new guarantor or cosigner, or confirm in writing that the other person’s bankruptcy will not trigger a default.
If your cosigner files for bankruptcy, you remain responsible for the full loan unless the lender releases you, refinances the debt, or another legal defense applies. Keep making required payments, communicate with the lender, and get any release or modification in writing. Do not assume the lender will remove a cosigner automatically.
If your co-signer files for bankruptcy or is no longer able to pay, monitor your credit reports closely. If the account is reported as late, in default, or involved in bankruptcy even though you are current and did not file, gather proof of your payments and dispute inaccurate information with the credit reporting agencies and the lender or servicer.
The Bottom Line
When you cosign or guarantee a loan, you accept the risk that the other party won’t pay. When you file for bankruptcy in California, be mindful of the effect it may have on anyone financially entangled with you and on any debt that another person is still legally responsible for. If you’re considering filing for bankruptcy, reach out to an experienced bankruptcy attorney to determine how best to protect your co-borrower, review reaffirmation or Chapter 13 options, and navigate your bankruptcy. Our legal team is available to help with a free consultation.