In many different places, getting loans or line of credit is not easy. There is always a requirement of a guarantor or a cosigner. Parents, relatives, spouse, or friends could play as guarantor/cosigner. How does the bankruptcy of one cosigner impact the other person? This is what we will discuss in detail here. For best and quick solution on bankruptcy related issues, just hop to Recovery Law Group.
Cosigner and the relationship
A Cosigner is a person who is liable to pay the loan in case the primary borrower defaults. The Cosigner is the backup plan for the financial institution to recover its debt. The cosigner could be a known or unknown person who agrees to do so. Cosigners are common for people with short or no loan or credit history. People with bad credit score, lower income, no assets to pledge as collateral, etc., usually require a cosigner for swift loan approvals. California, Texas, New York, Los Angeles, etc., are some states where you would typically see the use of cosigners a lot. However, as a cosigner one can be held liable in case of defaults, bankruptcy and other scenarios. Hence, one should be very cautious when opting for the role of a cosigner.
Impact of bankruptcy declaration
The unsecured debts which are usually the case with the debts associated with cosigner get released when bankruptcy is filed. The obligation for the primary debtor to pay off the debts is released. This is true for all types of unsecured debts. This release of obligation, however, does not apply to the cosigner and he/she still remains liable to the debt not paid by primary borrower due to bankruptcy. The primary borrower may declare bankruptcy through Chapter 7 or Chapter 13. In the case of Chapter 7 bankruptcy declaration, the primary borrower gets an ‘automatic stay’, which evades the borrower from all unsecured creditors. However, this benefit does not shield the cosigner. This means the risk and liability will shift to the co-borrower or cosigner completely.
How to protect your cosigner?
There are ways to protect the cosigner. The primary borrower is the primary link for the bank or any other financial institution. Hence, the cosigner would not know if any payment due has been missed or not been paid. Keeping the cosigner informed in advance can help in keeping the loan current and reducing the number of payment defaults. If you are the cosigner, it is a good practice to keep a check on the payments on every due date. Any payments missed will directly impact on the credit history, score and various other parameters for both the parties involved in the transaction.
- Reaffirmation of loan
Reaffirmation is a very difficult decision to make. This is another way of releasing your cosigner. Reaffirmation is the process of making the self completely liable for the loan. The process also will not allow you to discharge the unsecured debt even if you declare bankruptcy in the future. The bankruptcy of the primary borrower would not affect the cosigner however, default would. In the case of loan default, the cosigner will still be liable.
Chapter 13 bankruptcy declaration
Compared to Chapter 7 bankruptcy option, Chapter 13 is very beneficial for the primary borrower as well as the cosigner. The ‘automatic stay’ under Chapter 13 covers and protects the cosigner along with the borrower. This is applicable only if the primary borrower accepts to pay the debt in full and includes the same in Chapter 13 repayment plan. When creating a Chapter 13 repayment plan, one can include the cosigned debt and continue to pay the installments with the income available for disposable. This safety shield is a weak one though and can be breached by the creditors if payments are missed or if the bankruptcy is no longer applicable. Making payments regularly as per the Chapter 13 payment plan is the only way to safeguard your and your cosigner interests.
Credit score implications
A credit score takes a severe beating of about 200 points if not more if bankruptcy is applied or declared by the borrower. The cosigner might not be directly impacted by the primary borrower’s bankruptcy unless and until he/she continues to make the payments on time. The bank or financial institutions does not care if cosigner or primary debtor is paying the dues, the payments have to be made on time. Until this is true, cosigner’s credit score is safe. Missed payments directly negatively impact the credit score of both parties involved, the primary debtor as well as the co-borrower.
What happens if the scenario is reversed?
What if the cosigner or the guarantor is going to file bankruptcy? This can be a serious problem for the primary borrowers. Even if you are current with your payments, you can be in default if your guarantor defaults. This holds good in most student loan scenarios. This directly has a very negative impact on your credit score as well. To minimize damage, the best way is to disassociate the guarantor from the loan either by proving your credit worthiness based on historic payments to the bank or by employing a new guarantor. It is, however, difficult to remove or replace a cosigner or guarantor.
Cosigner and borrower relationship can be more complicated than it looks. If you are confused, need help or specialized professional assistance, reach out to (888)-297-6203 for the best solution for all your doubts and questions.