Cosigned loans serve an essential role in letting people who would otherwise be unable to obtain a loan to do so. If a person defaults on a cosigned loan, however, the cosigner can end up becoming liable for the entire amount of the loan. If you are experiencing financial difficulties and have a cosigned loan, speak with an experienced bankruptcy attorney who can help you determine your best course of action.

The Effect of Defaulting on a Cosigned Loan

Parents frequently cosign for children who have not yet established a line of credit. In some situations, however, adults sign for the loans of other adults, which can result in many complications. Often, if a person cannot make the required payments, the financial institution will pursue the cosigner for payments.

To stop collection efforts from credit agencies, individuals in these situations often decide to file for bankruptcy, which results in an automatic stay that prevents a court from collecting on a debt. Even though filing for bankruptcy prevents creditors from pursuing the person who has taken out the loan, these protections do not apply to a cosigner.  As a result, credit collectors in these situations frequently pursue the loan’s cosigner.

Chapter 7 Bankruptcy Options When a Cosigner is Involved

If a person files for Chapter 7 bankruptcy, any activities from collection agencies to pursue compensation must end. These protections do not apply to efforts made by collectors who pursue cosigners. Fortunately, there are several steps in Chapter 7 bankruptcy cases that can be taken to protect cosigners from the pursuit of creditors, which include:

 

  • Paying off debts. After a person discharges debt in Chapter 7 bankruptcy, he or she can still voluntarily pay off debts. One of the ways that some people who declare bankruptcy can protect cosigners is to make payments on a debt until the outstanding amount is paid off.
  • Reaffirmation of the debt. Before a person’s outstanding loans are discharged in Chapter 7 bankruptcy, a person has the option of reaffirming loans, which results in a person making him or herself personally liable for an amount. While reaffirming a debt is often not advised for individuals who declare bankruptcy, doing so can help to protect cosigners.

 

Chapter 13 Bankruptcy and Cosigners

Some people decide to claim Chapter 13 bankruptcy, which offers more time to pay off cosigned amounts as well as greater protection to cosigners. When a person files for Chapter 13 bankruptcy, an automatic stay is applies to the person filing bankruptcy and also to cosigners. In some situations, credit agencies might ask the court to remove this automatic stay.

Speak with an Experienced Bankruptcy

If you have a loan with a cosigner, filing for bankruptcy can be a particularly challenging process. On one hand, your financial future is important, but on the other handing declaring bankruptcy can result in strained relationships with a cosigner. Fortunately, attorney Jim A Lyon understands how complicated these matters are and can help you obtain the best possible resolution. Contact our law office today for assistance.