If a cosigner files for Chapter 7 bankruptcy, this can significantly affect the debtor’s remaining obligation under the loan and can accelerate the payment obligation.
In this post, we consider the relative obligations of a borrower and cosigner when the cosigner files for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code.
A Chapter 7 bankruptcy will relieve a cosigner of the obligation to pay the debt. It will not discharge the primary borrower, who, under the loan terms, remains responsible for payment.
Some loans that require a cosigner will have an acceleration clause if the cosigner files for bankruptcy. This effectively means that the loan goes into default. In this case, the cosigner becomes responsible for paying off the entire balance of the loan immediately.
If a default occurs, this could put the primary borrower into an untenable financial situation, which could lead to the primary borrower having to consider debt relief options, including bankruptcy. This is because lenders almost never release the cosigner from the obligation to pay if the primary borrower defaults, including by seeking bankruptcy protection.
If the primary borrower files for bankruptcy, this is one reason why the lender required a cosigner on the loan account in the first place.
Still, with many consumer loans, like car loans or furniture loans, the bankruptcy automatic stay that protects primary borrowers from collection efforts by the lender will also protect cosigners—at least until the bankruptcy case is discharged or the court dismisses the case.
Once the primary borrower’s bankruptcy is discharged, then unless the primary borrower has agreed to continue paying the debt outside of bankruptcy or to enter into a reaffirmation agreement, the lender can collect against the cosigner to pay the loan balance.
But what happens if the cosigner files for Chapter 7 after the primary borrower files for bankruptcy?
In this case, then the cosigner can also use federal bankruptcy law to seek protection from having to pay the debt.
Some kinds of loans, like student loans, car loans, and sometimes mortgages, require extra security before the lender will agree to make the loan. This security sometimes is in the form of collateral, like a security interest in the vehicle that is the subject of a car loan or a mortgage lien on a house.
In other situations, the lender may require additional security in the form of another person who agrees to remain legally bound to make the payments on the remaining balance of the loan if the debtor defaults. This person is a cosigner. The original borrower is referred to as the primary borrower.
Lenders often require a cosigner for first-time borrowers or first-time renters, especially if the primary borrower has any or all of:
The cosigner cannot be just anyone; the lender will be looking for a person who has a reliable source of income, an acceptable credit record, and sufficient assets.
Still, situations can occur when a cosigner runs into financial trouble. This can happen for a variety of reasons, like loss of employment or a serious injury or illness that entails big medical bills. Regardless of the cause, sometimes a cosigner may need to seek protection from creditors by filing for Chapter 7 bankruptcy.
In most cases, if you are making your monthly payments on time and have no missed payments as a primary borrower, a cosigner filing for bankruptcy will have no impact to your creditor or loan. However, in some cases, it can have a negative effect on your credit report.
If this happens, you may be able to contest this with the credit bureau. An experienced bankruptcy attorney can help you to do this.
Stone Rose Law represents Arizona residents in many kinds of bankruptcy issues, including situations when a cosigner files for bankruptcy. If this is your situation and you are concerned about its effect on you, call our law office at (480) 739-2448 to speak with one of our bankruptcy law attorneys.
In a free consultation, we can review the facts of your case and help you evaluate your legal options.If you prefer, use our online contact form to ask us a question or to schedule a free initial consultation with an experienced Arizona bankruptcy lawyer.
