When You Can't Pay, Your Cosigner Must!
Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
A lender often requires that you get a second person – a cosigner – to agree to pay the loan when you don’t have a credit history or an income the lender can rely on for you to repay it. Then, if you don’t make the payments, the lender goes after the cosigner for the money you owe.
If You File A Chapter 7 Bankruptcy…
the bankruptcy court’s “automatic stay” stops all of your creditors from their efforts to collect money from you. But your creditors can still pursue your cosigner for any loans that bear his signature.
If you don’t want your cosigner to be liable for your debts, then you can reaffirm your debts. This means that before your bankruptcy is over you agree to be legally responsible for certain debts after your bankruptcy has ended. As long as you make the payments as you’ve agreed, the creditor has no reason to pursue your cosigner for payment.
One other way to protect your cosigner is to pay off the debt. The bankruptcy court may discharge the debt, meaning you are not obligated to pay it. But since the lender would then pursue the cosigner for payment, if you paid off the debt, you would protect the cosigner from collection efforts.
If you file a Chapter 13 Bankruptcy, the court’s “automatic stay” protects your cosigners under what is called the “Chapter 13 Codebtor Stay”. However, the bankruptcy court could lift the cosigner’s protection at the request of creditors if (1) your cosigner got consideration for the creditor’s claim, (2) your repayment plan does not propose to pay off the debt completely, or (3) if the creditor will suffer permanent harm under the stay.
If you surrender your car as part of your Chapter 7 Bankruptcy, and the lender sells your car for less than you owe, then your cosigner is liable for the difference. For example, if the lender sells your car for $6,000 and the amount of the unpaid loan is $9,000, then your cosigner must pay the deficiency of $3,000 because he cosigned the loan.
After Your Chapter 7 Bankruptcy
… all of your unsecured debts have been erased. These include your credit card debts, personal loans, medical bills, some income taxes and utilities. Some income taxes and student loans survive bankruptcy. And other obligations can never be erased in bankruptcy, including child support, alimony and criminal fines.
And while the bankruptcy ends your requirement to pay, your cosigner is still on the hook for the full amount of the debt unless he, too, filed for bankruptcy.
When Student Loans Are Involved
… parents or other relatives often serve as cosigners. And if the student can’t make the payments, then these cosigners are left footing the bill.
Cosigners can sometimes get released from their student loan obligations. This is usually done by either paying off the old loan or refinancing with a new loan.
Another way for a cosigner to get released from a student loan obligation is by showing that the debt is an undue hardship through bankruptcy. Bankruptcy Courts handle these matters differently and each case is reviewed on its own facts.
If a cosigner files Chapter 13 Bankruptcy, he may pay part or all of the student loan obligation through his Chapter 13 repayment plan. Student loans are usually treated with the same priority as unsecured creditors.
If you have questions about your obligations as a cosigner, you’re invited to call me at 312-969-0730.