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.

Do I have to report loans that I Co-signed for in a Bankruptcy?

In bankruptcy you are required to disclose all of your assets and liabilities. A loan that you co-signed for is a liability. Even though you may never be asked to pay the loan, if the primary borrower makes all necessary payments, you are still liable for the loan and must report it.

When you file for bankruptcy you are required to disclose if any of your debts have co-debtors, as well. A co-debtor is someone who also agreed to pay that debt, in this case the primary borrower. Even if the debtor is discharged of their obligation for a debt, the primary borrower will still owe the debt.

In many cases, the filing of bankruptcy of one of the borrowers, even a co-signor, will constitute a default on the loan and the creditor can then accelerate the loan against the primary borrower if the debtor does not reaffirm. Accelerating the loan means that the lender requests full payment or in the case of a mortgage, forecloses. Despite this ability, in most cases lenders will not accelerate a loan, but will allow it to remain under the current terms if the primary borrower continues to make timely payments.

If you are a primary borrower on a loan and the co-signer is filing for bankruptcy, you should consult with an attorney about what your rights and obligations may be. It is important that you at least find out whether or not the co-signer intends to reaffirm their obligation to the creditor or whether you will be left owing the full amount yourself.