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Can You Protect Cosigners When You File Bankruptcy?

Updated on February 27, 2013

Deciding to file bankruptcy is often one of the most stressful decisions of your life.  Not only are you worried about your own situation and your financial future, but if you have cosigners you are concerned about how your bankruptcy will affect them and how it will affect your relationship with them. It is natural to try to find a way to safeguard family and friends who had enough faith in you to cosign a loan. 

What is a cosigner?

In some cases the primary borrower of a loan may not have had a high enough credit score to obtain the loan on his own. They are then asked to find someone with a stronger credit history to sign the loan with them. When someone becomes a cosigner, he agrees to be just as responsible for that debt as the primary borrower. You or the person who cosigned for you may not have clearly understood that at the time but that is the law.

The Risks of Co-Signing for a Loan

How will my cosigners be affected by my bankruptcy?

That depends on which type bankruptcy you file. If you choose Chapter 7 bankruptcy and are relieved of the responsibility for the debt, the debt then becomes the responsibility of your cosigner. If he fails to pay the debt, it will be his credit score that suffers.

If, however, you file for Minnesota Chapter 13 bankruptcy, a repayment plan will be set and monitored by the courts for a certain time period. If you make the scheduled payments, at the end of that time perio, both you and your cosigners will be relieved of the remaining debt. This is the only option where you may provide your cosigners with some protection.

What about my cosigner's credit?

Remember, any late or missed payments during the bankruptcy procedure will have a negative impact on your cosigner's credit history.  If you have defaulted on a business loan, neither you nor your cosigner will be relieved of responsibility of the debt even if you do file Chapter 13.

Will I be able to maintain a relationship with my cosigners?

Filing bankruptcy definitely puts you in an awkward situation with your cosigners.  Even though you never imagined that you would end up filing bankruptcy when you asked your cosigner for their help, you now find yourself a threat to their financial health.  Hopefully they had a clear understanding of the risks they were taking when they agreed to cosign the loan documents. 

If your cosigner paid the loan to protect their personal financial history and you care about maintaining the relationship you will try to find a way to repay them after your own bankruptcy has been finalized.

Ask your bankruptcy lawyer for advice about the best way to resolve your financial problems. An experienced Minnesota bankruptcy lawyer can look at your situation and discover what alternatives you may want to consider. Remember, the laws governing bankruptcy were designed to help those who really need it.

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      Rachel 6 years ago

      This is interesting. I have been trying to find information about what happens when things are the opposite. My husband has a car loan for which his mother co-signed. She filed bankruptcy, and now the bank will no longer send us statements for the loan. They said as long as we keep paying it, it will be fine. I am very uncomfortable not receiving statements, and I do not understand this since the loan is in mu husband's name--his mother was only the co-signer. I am worried about whether this is going to show up on his credit, and whether all of our payments are being counted (since we cannot access statements).

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