Thursday, May 31, 2012

I co-signed a loan and the primary borrower 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 without considering the long-term ramifications of that decision.

If the primary borrower defaults (or files bankruptcy), the co-signer will be required to pay the loan back. Additionally, unless the co-signer is also a “co-purchaser”, the co-signer is burdened only with the responsibility of repaying the debt and receives none of the benefit of the loan.

Consider the following 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. Adam files for bankruptcy, and surrenders (gives back the car to the lender) and obtains a discharge of the car loan. Betsy is still legally obligated to repay the unpaid balance of the loan, but does not get title to the car when she finally finishes paying off the car – which now belongs to the bank.

Being a co-signer can be extremely risky, and if the primary borrower files for bankruptcy, your credit can be affected. However, you can manage the credit damage by doing the following:

1. Determine whether the primary borrower intends to reaffirm the debt in bankruptcy court, (i.e., keep the car and continue paying the loan), or will surrender it back to the lender.

2. If the primary borrower is going to reaffirm the vehicle, ensure that they keep the payments current through bankruptcy, and sign the reaffirmation agreement.

3. If the primary borrower is not intending to reaffirm, or has already lost the vehicle due to repossession, the only way to protect your credit is to repay the loan pursuant to the terms of the agreement

4. Be aware that many loans include an acceleration clause, meaning that if one of the borrowers files bankruptcy, the entire balance of the loan is due. If the lender exercises their right to accelerate the loan, the co-signer may not be able to make regular monthly payments.

Remember, the decision to co-sign a loan is often made out of a desire to help a friend or family member, but it comes with significant legal consequences if they fail to repay. Consider any request to co-sign a loan carefully, and if the primary borrower 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.

43 comments:

  1. I have found out that being a co-signer on a loan is extremely tricky. I think that a co-signer should always be a co-purchaser. That way if something unfortunate happens, at least the co-signer gets to keep the property that the loan was for and not lose it to the bank.

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  2. I made the huge mistake of co-signing a home with an ex-boyfriend (this was going to be an investment property). We broke up, he chose not to short sale and stay in the house. After two years, he became delinquent with payments and I just received notice (as a possible creditor) that he has filed Chapter 7 Bankruptcy. I tried multiple times to get in touch with him and he ignored my calls and emails. Is there anything I can do now to protect myself and can it affect my current home (I have property I bought before the investment property). Thank you for your time. By the way I am in CA.

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    1. You should speak with an attorney in CA. You may need to take action in the bankruptcy case, such as filing a proof of claim.

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    2. Im seeking advice on a similar issue. An ex friend co signed for me on a car loan and recently had the car towed. So, she could have a car to drive. Her car was repossessed. Obviously, she is bad with paying bills and I want no parts of the car nor the loan. She had a key cut and programmed. So, my key no longer works thats why I decided not to fight with her over the vehicle. I was told that I can file chapter 7 bankruptcy to get out of the loan. She can keep the car. I just want my name off the loan. Since, she has the vehicle. Is chapter 7 the right choice?

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    3. There are a lot more factors that go into a decision of whether or not to file a bankruptcy, and whether or not you qualify to file a Chapter 7 bankruptcy. You should speak with an attorney to determine if that is your best option or if there is other recourse you have against this ex-friend.

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    4. Once the bankruptcy petition is filed, all collection and foreclosure proceedings are stayed, meaning, the harassing telephone calls, letters and emails end…debtors once again have peace of mind…somewhat.Bankruptcy Debtor’s property becomes part of a “bankruptcy estate”.The bankruptcy estate may be thought of as a third party that holds title to property until it can be determined what should be done with such property.important to understand that (a) bankruptcy involves a risk of losing property and (b), while a case is pending, ownership is actually held by the bankruptcy estate, not the Debtor who filed the case.For more information Contact us www.nawestlaw.com

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  3. I am in a chapter 13 and was in the bankruptcy when my fiance needed a cosigner for his car. No one would finance us because I was in chapter 13. He found a dealership to use me as a cosigner and he has been making his payments fine. He has talked about not paying anymore payments because of his income changing. Is it possible for me to come off this consignment?

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    1. Anonymous,

      Look at this from the lender's perspective. Unless they are being paid, why would they release a potential payor from responsibility? Their goal is to be paid, which is why in most cases the only way to be removed as a cosignor is for the loan to be paid (or refinanced with another lender).

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  4. Start from the beginning I wanted to get a car in my name since the car I had was only in my mothers name. When I went to purchase the vehicle I was told that even though my credit was perfect 765 that my mother still had to be on the loan to transfer the ownership of the old car to them. Now 3 years later, a divorce and disability then lose of job I was forced into bbankruptcy by my X spouse who refused to pay his debt. My attorney stated he worked things out with the auto company and that I nor my mom would owe anything. Today I get a letter stating different. Was I wrongly advised and what can I do ?

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    1. Shelby,

      The questions you're asking require a lot more information than what you have provided here. You and/or your mother should speak to an attorney, and you should bring that attorney all of the documents that you've referenced.

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  5. in 09/1996, I co-signed an education loan for my daughter. Unknown to me, she later filed for bankruptcy. I find out this week that the bank posted a "Charge Off" to the account in 02/2013 to my credit report. Shouldn't I have been made aware of her bankruptcy filing and do I have any options to get this off my credit report? Thank you.

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    1. You should have received notice of the bankruptcy as a co-debtor, but it is unlikely even with notice that you would have been able to prevent this item showing up on your credit report through action in the bankruptcy court. To remove an item from your report, you should start by contacting the creditor to find out if they are willing to remove it from your credit report. If you want assistance with this process you should contact an attorney.

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  6. I am a co-borrower on a car loan, my ex-husband was ordered in domestic court to pay for the loan. He ended up defaulting, losing the car and now the bank has filed suit against me and my husband. My ex says he will start paying but he won't ever pay, and I've heard he plans on filing for bankruptcy. I am going to settle with the creditor and start making payments on the car loan, and intend on getting a judgment against him(he is in contempt of court and getting a judgment will be no issue I'm told). If he files for bankruptcy before or after I get a judgment, will I not be able to collect on that? Can bankruptcy discharge a debt? Isn't marriage and a divorce decree a binding contract? Please help!

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  7. Hello,
    In 2007 myself and fiancé bought a home. In 2010 we divorced and in divorce decree judge awarded ne responsible for home debt, we quit claimed home to me, and in decree I agreed to make payments to keep home. In 2011 I re- Modified loan under Hope for Home owners a government plan under my name only, Last year in 2012 my ex husband went bankrupt chapter 13. Since than it has affected my loan causing it to go into a different category with fees monthly. mortgage company says that his lawyer needs to reaffirm it. HIs lawyer says that isn't true that if it was on his credit report at time of filing than no. I want to be sure if I sell home profits will go to me? Or what happens when loan is released does it default?

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    1. You should consult an attorney with all of the paperwork. If the divorce decree states you are responsible for the home debt, then the ex-husband cannot be compelled to reaffirm the mortgage. If you have a valid quitclaim deed to you individually, then you are the only owner and any profits from sale would belong to you. However, we can't comment on whether any of your documents have been prepared correctly to effectuate all of these results and you should have an attorney review the documents to ensure you are properly protected. The interplay of Divorce and Bankruptcy is very complicated, especially when it comes to real estate.

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  8. I need (free) advice, hence the post to this site:
    I cosigned for a friend who needed my help in getting a stove and refrigerator.
    She never made a payment on the bill and 3 months later I found out that she filed for bankruptcy almost as soon as they were delivered to her house...she used me just to get new appliances....she wanted to fill her house but thank God I talked her out of that because I would've been on the hook for a whole household full of furniture and not just kitchen appliances.
    Here's my question....as soon as I was contacted by the furniture store I caught up past due payments and have been making regular monthly payments to keep my credit in good standing but I feel those appliances are mine since I'm paying for them....Who legally owns them....her, since she declared bankruptcy? Or me, since I've made every single payment on them.....if I am entitled to them legally do I have to wait until they are finished being paid for before I can sue her for the return of them?
    Can I take her to small claims court and get a judgement on the appliances?

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  9. The Automatic Stay in Bankruptcy Court prevents you from collecting against her in small claims court while the bankruptcy case is active, and if she receives a discharge you may be prevented from collecting against her after the discharge as well. You should file a claim in the bankruptcy case.

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  10. I had my dad co-sign for a student loan 11 years ago and now I am getting to the point where the payments are just too much. If I was to claim chapter 7, how would this affect my dad's credit score or would it?

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    1. That would depend on whether your dad paid the student loan or not. If the loan is not paid and he is a cosignor then it will negatively affect his credit score. Student loans are typically not dischargable in chapter 7 bankruptcy anyway, so you may not be able to accomplish what you are looking to do with a chapter 7. We strongly recommend you consult with an attorney.

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  11. May I have some help please? My mom co-signed on a vehicle for me because I really needed one for me and my child. Now, past credit card and medical debts are forcing me to file for bankruptcy. However, I can still afford to make my car payment on time. So, if I file for bankruptcy for the past debts, but still make the car payment on time every month, will and how will my mother's name and credit be affected? Will filing affect her score when if the car payments get paid on time?

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    1. It is possible that the car loan will be put in default if you file bankruptcy which could affect a cosignors credit. Typically, though, a lender will be willing to continue the loan if it is reaffirmed after the bankruptcy. Whether or not to reaffirm a debt and keep paying it is a decision that has numerous factors and you should review this decision with your bankruptcy attorney.

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  12. I just found out my son is going to file chapter 7. I had cosigned several student loans for him, some federal and some private. He has been making payments and I believe he is current but his barely minimum wage job is not enough to cover both those loans plus his credit card debt. What typically happens with those student loans and what is my responsibility?

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    1. If you signed as cosigner then you are responsible if your son doesn't pay, even if he discharges the debt.. He may also continue to be responsible, since most student loans are not dischargable in bankruptcy. This means that the student loan companies could try to collect against either of you. It is in your best interest in keeping your credit clean, that he or you continue to pay those loans. For more information about co-signing loans see our latest post: http://bankruptcyma.blogspot.com/2014/08/good-idea-bad-idea-cosigning-loan.html

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  13. my husband has been receiving letters in the mail addressed to him and when he opened them they had his parents names on the inside so he didn't tell me about them and just took them over to his mom and didn't read anything else in the letter well I just happened to be the one that checked the mail the other day and so I opened and read it and started immediately questioning it they are use my husband and lie to him all the time because they know he is to naïve to believe that they would do anything wrong to him anyways he called and asked what was going on and his mom asked why I made him call so she had to tell him that they were filing for bankruptcy and the reason he got the letter in the mail is because his dad signed with him on his truck she kept telling him that it wouldn't affect his credit and he didn't have anything to worry about we are just getting started and we don't need anything to harm us what should I do

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  14. My ex wife was a co-borrower on an FHA backed loan, We seperated and filed for divorce. I moved out of the house and I filed for chapter 7 bankruptcy. She remained at the house. My bankruptcy cleared...the house foreclosed after. Was at the point of my bankruptcy closing, the mortgage hers and me removed?

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    1. I'm not sure I fully understand your question. If you are asking whether your bankruptcy filing removed you both from liability for the mortgage then the answer is no. Your bankruptcy filing, if it was not joint with your ex-wife, would only affect your liability for the mortgage. I suggest discussing your situation more specifically with an attorney in your area who is familiar with both divorce and bankruptcy law to clarify your obligations.

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  15. I co singed on a car loan 15-16 years ago. The person filed bankruptcy at least 10-12 years ago. Am I still liable for this loan?

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    1. That's not nearly enough information to answer your question. A good first step would be to pull your credit report and see if the loan appears on there and whether it has been paid off or not.

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    2. This isn't on my credit nor has it ever been. I received letter 2 days ago. I called the debit collector and he stated that the borrower filed for bankruptcy and that covers them not me. The bankruptcy is settled and that since I promised the loan by co signing I would have to pay.

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  16. The loan never appeared on my credit. It's still not on my credit. The debt collector sent me a letter saying I owed for the loan. No correspondence at all until now. The debt collector told me the person borrower was protected under their bankruptcy. I as the co signer am not covered and since i co signed I promised to guarantee to the loan. He also stated that the bankrupcy was settled and i would have to pay this loan now.

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    1. Co-signing does make you liable for the loan and the primary borrower filing bankruptcy does not end your liability. Whether you are still liable 15-16 years late is a different question. You should contact an attorney in your local area to review the case and help you determine if you have any defenses.

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  17. My husband and I bought a house. My husband was listed as primary and myself and my grandfather were considered co borrowers. We filed for chapter 7 bankruptcy in 2012. We didn't include our home in the bankruptcy but the bank hasn't ever sent us reaffirmation papers. My grandmother just now sees on her credit report that our house is paid off, but it's not. We never told my grandparents about the BK and I've been reading that they should've received a notice. I don't think they did or they would've called me. The house shows on our credit and it's not paid off, what do you think happened? Would I need to call the bank and ask or should I contact the BK lawyer? Or should I just let it go? We are current on our house payments so I'm not worried about them being responsible for anything but not sure what I should do about it showing up paid in full on their,credit.

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    1. I'm sorry, but I'm not sure what your question or concern is. If you have a lawyer who assisted with your case, I suggest contacting them with your question.

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  18. I was the primary borrower of a car loan with my ex boyfriend , my ex was the co-signer. We broke up, I couldn't make the payments, he kept the vehicle, and said would take over, he never made any payments on it, the bank was trying to repossess the vehicle, but they couldn't find the vehicle, I tried multiple times to get in touch with him to give the vehicle to the bank since he wasn't paying it or to give me back the vehicle, so that I could get into a payment arrangements with the bank, he ignored my calls and emails. He said he sold the vehicle and that it was somewhere in Mexico. I didn't hear anything else for years till, I checked my credit and the loan was there as delinquent , and now I received a letter that the bank filed a lawsuit against us. I don't want to pay for a vehicle that i don't have and don't know where it is . I want to know , if I can suit my ex boyfriend for the amount they are suing us since he took the vehicle? Is there anything legal I can do against him? It's possible that he could of sold the vehicle even if is in my name? Can I file a police report against my ex? What can do. Please help.

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    1. It is likely that you can sue your ex or bring him into the lawsuit by the bank. You may be also be able to settle with the bank. You should discuss these details in more depth with an attorney in your area.

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  19. I co signed on a loan and they primamry filed ch 13 bankruptcy. I tried to call and pay the debt to have it removed from my credit but they say im not able to pay on it since the loan is in the ch 13 bankruptcy. I want to buy a house now will this loan being in ch 13 stop me from purchasing?

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    1. The Ch 13 Trustee is supposed to maximize payments to creditors. If you contact the Ch 13 Trustee and tell them what you wan to do, they may be able to help, because if you pay that bill, that means more money in the plan for other creditors.

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  20. I have a friend who co signed a car loan with me, I am the payer, I do not ask her to pay for the car in any way. She is filing for bankruptcy, and I am not sure what to do. She doesn't make any of the payments, I make them all, however she is listed as the primary, will I lose my car?

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  21. I am co-signing for a friend on a car loan.Since I have good credit, he'll pay no interest.Can I wright up a letter stateing that if he misses payments the car will automatically be mine and I will continue the payments?

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    1. A letter wouldn't really be enforceable. You could write up a contract between you and your friend to that effect. You could also both go on the title.

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