When someone co-signs a loan for you, they are promising to repay the loan in case you’re unable to pay it back. So, if you stop paying on the loan, the lender is going to go after your co-signer. If you’re thinking about bankruptcy, it’s important to consider what impact it will have on your co-signer.
The good news is that you may be able to protect your co-signer when you file bankruptcy. The bad news is that doing so means you have to file Chapter 13 bankruptcy. Unfortunately, of the two primary consumer bankruptcy chapters, 7 and 13, only Chapter 13 offers protection for co-signers. Since there is such a big difference between Chapters 7 and 13, you may decide that despite the co-signer protection that Chapter 13 offers, Chapter 7 bankruptcy is your better choice for other reasons.
Another option is to prepare your co-signer for your bankruptcy filing. Let her know when you’re filing, and that she might start getting calls and letters from the lender or collection agency looking for payment. You don’t want her to be caught unaware when they start bugging her, and you don’t want to damage your relationship with her, either. After you’ve filed bankruptcy you might be in a better position to repay the debt (even though you’re under absolutely no legal obligation to do so), which would take the heat off your co-signer. Of course even if you do prepare her for your filing, it may cause some tension in your relationship.
The impact of bankruptcy on your co-signers is just one of the issues to consider when thinking about bankruptcy. If you’d like to learn more, schedule a free consultation with a bankruptcy attorney. During this no-obligation consultation you’ll learn more about the bankruptcy process and whether it’s your best option.