Thursday, May 31, 2012

I am the primary borrower on a loan and my cosigner has filed for bankruptcy. What should I do to protect myself?

A co-signer is an individual who is promising to repay a loan in the event the primary borrower defaults. In many cases, having a co-signer on a loan may have been necessary to obtain the loan because the primary borrower’s credit rating was insufficient to qualify on their own, and the co-signer stepped in to assist the primary borrower to obtain financing.

As we discussed in our previous post, if the primary borrower defaults (or files bankruptcy), the co-signer will be required to pay the loan back. But what about the reverse situation?

How is the primary borrower affected if the cosigner files for bankruptcy?

Consider the same example: Adam wants to buy a car, but can only qualify for a loan with a co-signer. Betsy agrees to co-sign, but her name is not listed on the title as an owner of the vehicle. This time Betsy files for bankruptcy and obtains a discharge of the car loan. For the sake of simplicity, we will assume that Betsy has no ownership in the vehicle that may be attributed to her by the Trustee.

Adam is still legally obligated to repay the unpaid balance of the loan. However, when Adam pays off the loan, all liens will be released, and the title will be issued in Adam’s name. Most auto financing agreements make no distinction between the “borrower” and “co-borrower” aside from whose name the title will ultimately be issued to. As such, the bankruptcy of a co-borrower is similarly a breach of the terms of the loan, and could result in a default under the terms of the note. As before, the bankruptcy (and discharge) of the co-borrower’s obligation leaves the lender in a position where they can only pursue one individual, not two, in the event the loan is not paid.

This material departure from the original agreed upon terms could be considered a default, and in fact, many auto financing agreements specifically include such a term. However, it has been my experience that the lender will receive a greater financial return by accepting the primary borrower’s monthly payments than they would by repossessing the vehicle and selling it at auction, meaning that the primary borrower will likely keep the vehicle, despite the co-borrower’s bankruptcy.

In the event a co-borrower files for bankruptcy, the best thing that the primary borrower can do is seek to refinance the balance on the car loan, if possible. Many credit unions and some larger banks offer automobile refinancing loans. By refinancing the loan, the primary borrower has effectively paid off the loan securing the vehicle, and negated any circumstances which could trigger a default. If handled properly, and for a qualified borrower, it is often possible to keep payments the same, or even lower payments upon refinancing the car.

A borrower may be tempted to sign a reaffirmation agreement presented by the lender. However, executing the reaffirmation agreement is, in my opinion, not a legal guarantee that the bank will take no further action, nor will it cure any default under the terms of the note upon the co-borrower’s filing for bankruptcy. First, in order to cure the issue of default, at a minimum, the co-borrower filing for bankruptcy would have to sign. A reaffirmation agreement is an agreement arising in the context of a bankruptcy case. Here, the primary borrower is not seeking bankruptcy protection, nor is he electing to “remove” the debt from the discharge order; and therefore the primary borrower, Adam in our example above, has no standing to sign the reaffirmation agreement.

The bankruptcy of a co-borrower should not appear on Adam’s credit report, but because some lenders will automate their reports to credit agencies, there is a reasonable likelihood that the entry may make some indication of bankruptcy. If this happens, the information in the credit report is incorrect. It may be necessary to contact the three credit bureaus (Equifax, Experian, and Trans Union) as well as the lending institution to ensure that this information is correctly reported on the primary borrower’s credit report. Again, refinancing with a new loan is the simplest way to resolve this issue because then the loan will be listed as paid, and the new loan will report positively on a credit report (as long as you continue to pay it on time).

As with the decision to co-sign a loan, the decision to obtain a loan requiring a co-signer comes with significant legal consequences if the co-signer does not honor the terms of the note. Consider the need to take out a loan with a co-signer carefully, and if the co-signer files for bankruptcy , it may be worth your while to reach out to a bankruptcy attorney to better understand your options and obligations regarding the loan.

26 comments:

  1. Thanks for all of this information. Your site has been very useful. My sister recently filed for bankruptcy. Now we are looking into post-bankruptcy advice. You got any?

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  2. If I file chapter 13 on my ex-wife's home, as a co-borrower in the state of Florida, and list my unsecured debts like credit cards, and pay them off in a year, would this release me of all responsibilities for the home. Quick claim deed is in her name. She did a Loan Mod and I didn't sign, but Ocwen Loan Servicing told me they will not release me. Her child support is more that the house payment

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    1. Anonymous,

      Any Chapter 13 plan will have to account for the home mortgage as well if you are still legally liable for it.

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  3. Does this situation you explain on top also apply to mortgage?

    My wife is filling BK 7 and she helped her parents in law to cosign a mortgage 3 years ago. Her parents have full intention to keep the house. Can they refinance the house after the discharge even tho my wife name is on the deed?

    Thanks!

    ReplyDelete
    Replies
    1. The issues addressed in this post do apply to mortgages. Whether or not your in-laws can refinance will depend on many other questions, but your wife's name on the deed and her bankruptcy should not limit their ability if they otherwise qualify.

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  4. My girlfriend's parents cosigned a student loan for her through Wells Fargo. They went into bankruptcy, Wells Fargo claimed they weren't allowed to release any information about the loan till the bankruptcy was complete. This left my girlfriend in the dark about how much she owed and what the monthly payment should be. During this time she was charged late fees and because she didn't know the what the minimum payment should be but paid on it monthly. The parents are now out of bankruptcy and while trying to get a loan for a home purchase she discovered that Wells Fargo had sent this loan to collections. She was able to get a total amount due and pay that off.

    Is there any recourse for these late fees and the knock against her credit score since she was basically kept in the dark?

    ReplyDelete
    Replies
    1. The loan information should have still been available to the primary borrower during the bankruptcy. Whether she has any recourse for the late fees would depend on what she did pay, how much information she had, and what documentation she had regarding Wells Fargo's refusal to cooperate. Regarding the credit score, once a delinquent account is paid the credit score starts to bounce back over time. To try and have the delinquency removed, she could appeal to the credit agency's and explain her story.

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  5. In my situation, I kept a car that my dad had co-signed for. I had been making the monthly payments that were agreed on before the bankruptcy. But when pulling my credit report earlier this year, I found that my payments had changed and they had never notified me because of the Chapter 7, which has brought my credit back to where it was before bankruptcy. Also, I noticed that on 2 of the 3 CBR, the car in question is showing as 0 balance filed in bankruptcy. Any ideas as to what I should do next? The car isnt showing on my dads Credit Report at all.

    ReplyDelete
    Replies
    1. Often Credit Reports don't reflect completely accurate information. There are ways to update or correct your credit reports and you should consult with an attorney or credit expert in your area to find out the best steps to take in your situation.

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  6. Thanks for your information on the issue. I guess it also applies to the daughter being the primary borrower and the mother being the co-signer right? My mother wants to file for bankruptcy, but she co-signed for me on a car loan. I can't really pay off the loan myself and I want to keep the payments that we are making every month, is there a way to keep it like that? Also, I wasn't really clear about the credit rating part. So, if my co-signer files for bankruptcy, I get affected too because we signed for the loan?

    ReplyDelete
    Replies
    1. The relationship between primary borrower and co-signor doesn't affect their legal obligations to the creditor. If your co-signor files for bankruptcy, then your car loan could be effected. However, most lenders will allow the primary borrower to keep the car if you keep making payments. The primary borrower's credit rating should not be effected by a co-signor's bankruptcy, but information is not always reported to the credit agencies correctly, and you should check your credit regularly to ensure that all information on your credit report is up to date and correct.

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  7. Kind of a crazy situation and question please help, my husband and I filed chapter 7 3 years ago my father co signed our mortgage about 6 years ago. We were able to keep our house and pay all payments on time but no my father (our cosigner) might have to file bankruptcy himself. Can we actually lose our home now since it has already been in a bankruptcy once ? Thanks

    ReplyDelete
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    1. If you have reaffirmed your mortgage loan at the time of your bankruptcy, a co-signor's bankruptcy should not affect the loan, but to be sure about your situation I would suggest consulting with your father's bankruptcy attorney.

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  8. My father cosigned for a car loan for my brother's wife last summer. They have since divorced and she's in the process of filing for bankruptcy. My father was recently diagnosed with moderate to advanced dimentia by an neurologist. The Dr advised that the condition has been getting progressively worse over the course of the last three to five years. My father would have never cosigned if his mental capacity weren't diminished. How do I get him off of the note before her bankruptcy proceedings conclude?

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    1. While lack of capacity may be a defense to a collection suit, it may not be possible to remove him from the note. I suggest consulting with a bankruptcy attorney in your area.

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  9. about 4yrs ago my brother bought a house and because he had a bad credit score he needed a co-borrower. he had me sign as the co-borrower. i only stayed with them for a month and had no news about the house till about 2 years later when he told me that on the mortgage, my name is in as the Main person (don't know legal term).
    he has filed for bankruptcy months ago and i just recently found out. will this affect my credit score? i've been paying all my bills on time my whole life so i really hope not.
    also, is it possible to get my name off of the house?
    i am not actively participating in maintaining the house, nor have i resided there and i am also not the benefactor. my brother has elected his wife and kids as the benefactors of the property in case something happens to him.
    Do laws about this differ in each state?

    would appreciate any help :)
    thank yoU!

    ReplyDelete
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    1. You should talk to a local attorney about what rights and obligations you have. As we explain in our latest post signing a loan is a pretty serious obligation that many people take too lightly: http://bankruptcyma.blogspot.com/2014/08/good-idea-bad-idea-cosigning-loan.html

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  10. If my co-signer of a loan filed chapter 13 bankruptcy in 2010, but the loan company continued to send me statements each month and I continued to pay on the loan every month until 2012. In 2012 they put the loan in default due to the 2010 bankruptcy filing. Are they able to default the loan 2 years later even though they were accepting payments.

    ReplyDelete
    Replies
    1. The answer depends on the terms of the loan and other facts which are not included in your question. You should take the loan documents, your payment history and the information about your co-signer's bankruptcy to a local attorney for a complete review and opinion.

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  11. Dear Justin,

    My mother needs to refinance her condo through the government HARP program to lower the monthly payment. She is the only person on the mortgage loan and she has been out of work for the last 8 years. My father has made all the payments and on time. However, his credit is bad and he owes some lenders (banks, credit cards, etc) money. He earns a low, but stable income. Based on his pay stubs, my parents qualify for the HARP program. Their concern is that if my mother refinances with my father being the co-signer, can his lenders put a lien against the condo and/or can they lose the condo all together. Looking forward to your reply.

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    Replies
    1. The answer to this question depends on what state you live in. You should consult with a local attorney.

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  12. Going through divorce, bought my ex out of the house 3 yrs ago when we separated. He signed quit claim deed over to me. I have been making payments on time. Knowing that he was going to file chapter 7 bankruptcy, I refinanced my house. Both names were in old loan. He filed bankruptcy on 12/3/14 and even though old loan was not included in bankruptcy, they put a code of bankruptcy on it. Old loan received my pay off on 12/16 and are holding the funds. After getting the runaround from them, they told me that he because of the bankruptcy code, they have to hold the funds for 5 days. Is that normal? Any chance they may reject the payoff? I am the co-borrower in the loan and have nothing to do with the bankruptcy. I want to pay off this loan and keep my house. Please help! Thank you

    ReplyDelete
    Replies
    1. That is certainly bad timing. They should not reject the payoff, but you may want to have an attorney follow up with them and review your mortgage agreement.

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  13. I have a car loan through Santander and my aunt as a cosigner. A few mouths after she filed for bankruptcy and since then the loan has been through there bankruptcy department. They haven't been filing on my credit and wiped all of it I had from it before. I'm now trying to get a new car and there is no paper trial of me owning the car I own now in the first place. If I was to just give them the car could they even do anything even though I still owe them money for the loan?

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    1. I'm not sure what you mean by "no paper trail." Presumably there is a title for the car and a promissory note for the loan. You still owe the money for a loan that you agreed to pay unless you have also filed for bankruptcy. Just because something is not on your credit report does not mean you do not owe it or that it does not exist. Credit reporting is a separate issue from actual liability.

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