For those with less than perfect credit, getting a co-signer can mean the difference between obtaining financing for a large purchase or having a loan application denied. By agreeing to co-sign, the co-signer accepts full responsibility for payments on the loan in the event that the primary applicant cannot keep up with his financial obligations. Should the individual file for bankruptcy, his co-signer may be liable for the full amount that he borrowed.
Types
A consumer may file for Chapter 7 bankruptcy or she may choose Chapter 13 bankruptcy. In a Chapter 7 case, the bankruptcy trustee works with the court to liquidate the individual's assets and use the available funds to pay off as many creditors as possible before discharging any remaining debt. Debtors filing under Chapter 13 must repay their creditors under a strictly structured repayment plan. This process takes from three to five years. After the repayment plan is complete, the bankruptcy court discharges any remaining debts.
Facts
If an individual can successfully pay off his loan through a Chapter 13 bankruptcy repayment plan, his co-signer will not be held responsible for repaying the debt. The same is true for individuals who opt to "reaffirm" debts in Chapter 7. When a debtor chooses to reaffirm a debt, he petitions the court for the right to retain responsibility for repaying the creditor in question. Reaffirmed debts do not need to be paid by co-signers.
Significance
A co-signer can be held legally liable for any debts not paid through the bankruptcy. If, for example a debt for a personal loan is discharged during Chapter 7 proceedings, the original loan holder no longer has to pay the creditor. The co-signer, however, did not file for bankruptcy and must repay the full amount owed to the creditor. The same can occur if a co-signed debt is not paid in full with a Chapter 13 repayment plan. The co-signer must repay any leftover debt.
Considerations
When an individual agrees to co-sign a loan for a loved one, the creditor reports the loan to the credit bureaus and it appears on both the primary applicant's credit report and the co-signer's credit report. Should the primary applicant then file for bankruptcy, the creditor updates the loan's status to "included in bankruptcy." Unfortunately, this update also appears on the co-signer's credit report--even though he isn't the one who filed for bankruptcy.
Warning
According to the Federal Trade Commission, a creditor may opt to sue the co-signer for the unpaid amount of a loan included in the primary applicant's bankruptcy. This can result in the co-signer suffering a wage garnishment or bank levy. In some cases, the creditor may opt to place a judgment lien against any property the co-signer owns--effectively preventing him from receiving any proceeds from the sale or transfer of his property without first paying off the debt he co-signed for.
Tags: primary applicant, repayment plan, Chapter bankruptcy, file bankruptcy, must repay, co-signer credit, credit report