It is critical to understand the real impact of cosigning a loan before you do so. If you are worried that filing for bankruptcy might affect someone else, you are not alone. I often speak with people who are facing financial hardship and feel guilty about how it might impact their loved ones. Maybe your parent, sibling, or partner cosigned on a car loan for you. Or maybe you cosigned for someone who is now planning to file for bankruptcy. In either case, you could be at risk for much more than losing the vehicle. If the car is returned or repossessed, the cosigner could be held responsible for the entire balance of the loan.
Why Cosigners Are Still Liable After Bankruptcy
At our firm, we help good people get back on their feet during tough financial times. One of the most common issues we see is the fallout that happens when one person files for bankruptcy on a car loan that was cosigned. If you cosigned a loan for a child, a friend, or a partner, and they file for bankruptcy, you may be surprised to find that the lender can still come after you for the debt. Bankruptcy might discharge the primary borrower, but it does not erase your responsibility as a cosigner.
What Happens Under Chapter 7 Bankruptcy
Let me break this down clearly. In a Chapter 7 bankruptcy, the borrower’s debts are wiped out. If they surrender the vehicle and the car is sold, there could still be a balance left over. This is known as a deficiency. You, as the cosigner, can be held responsible for that balance. Even if the borrower keeps the car and agrees to continue paying through a reaffirmation agreement, you are still on the hook if they default. If payments fall behind or the car is repossessed, the lender will come to you for what is owed, and your credit could take a serious hit.
How Chapter 13 Bankruptcy Affects Cosigners
Now let’s talk about Chapter 13 bankruptcy. This option sets up a repayment plan that lasts between three and five years. It might offer you temporary protection because of something called the automatic stay, which stops creditors from pursuing collection efforts. But if the borrower stops making payments and the court lifts that stay, the lender can come after you again. Cosigning a loan is a legally binding commitment. Bankruptcy does not cancel that agreement. Instead, it just shifts the responsibility to you.
What You Can Do as a Cosigner
If you find yourself in this situation, there are a few smart steps to take. First, reach out to the lender. You might be able to renegotiate the loan terms or settle the balance. If possible, keep the payments up to date. This helps protect your credit and can prevent repossession. If you are also struggling financially, talk to a bankruptcy attorney. It may be that filing bankruptcy yourself is the most protective thing you can do for your situation.
Communication Is Key Between Borrowers and Cosigners
If you are the one considering bankruptcy and you know someone cosigned your car loan, talk to them before you file. They deserve the opportunity to understand what is happening and prepare accordingly. At the end of the day, cosigning is a shared responsibility, whether life goes smoothly or not. Bankruptcy might relieve one person, but it often leaves the other person responsible for the full debt.
We Can Help You Navigate the Next Steps
If you are in this situation as a borrower or a cosigner, we are here to help. We will walk you through your options and guide you toward a path that makes the most sense for your financial future. You do not have to go through this alone. Let’s talk about how to protect yourself and the people you care about. Contact us today to schedule a consultation.