Will filing for bankruptcy affect my cosigner?

On Behalf of | Jun 24, 2024 | Bankruptcy |

You are struggling financially and considering filing for bankruptcy. But what about your cosigner, the friend or family member who stepped in to help you secure a loan? In North Carolina, as in other states, cosigners are not protected by the primary borrower’s bankruptcy filing and can face serious financial consequences.

What happens to cosigners in bankruptcy?

When you file for bankruptcy, whether under Chapter 7 or Chapter 13, the automatic stay halts collection actions against you. However, this protection does not extend to your cosigners. Creditors can still pursue cosigners for the remaining debt. The type of bankruptcy can impact cosigners in different ways.

Chapter 7 bankruptcy

A Chapter 7 bankruptcy liquidates your non-exempt assets to pay off creditors and discharges most of your remaining debt. However, this discharge doesn’t extend to your cosigner. Creditors will turn to cosigners to recover the unpaid debt, potentially damaging their credit scores and financial stability.

Chapter 13 bankruptcy

Chapter 13 takes a different approach. It involves a repayment plan that lasts three to five years. During this period, a co-debtor stay is often in effect. This means creditors cannot pursue cosigners while making your scheduled payments. However, creditors may again target your cosigners for the debt if you fail to adhere to the repayment plan.

Protecting your cosigners

Keep your cosigners informed about your financial situation and decision to file for bankruptcy. Transparency can help them prepare for potential creditor actions. There are instances where you can negotiate with creditors to release cosigners from their obligations or restructure the debt to mitigate their risk. Continue paying for cosigned debts even during bankruptcy to prevent creditors from going after your cosigners.

While bankruptcy helps individuals manage overwhelming debt, it is crucial to understand how this decision affects cosigners. Consulting a legal professional with a background in bankruptcy may help explain the impact of bankruptcy on your cosigner, explore alternatives and guide you through the process to achieve the most favorable outcome for everyone involved.

Knowing the implications of bankruptcy on your guarantor and taking proactive steps can help protect your finances and the relationships you value.