Filing for bankruptcy is a significant decision with far-reaching consequences. If you’re considering Chapter 7 bankruptcy and have a cosigner on any of your debts, you might be wondering what happens to your cosigner. It’s a valid concern since your financial choices can impact those who’ve agreed to back your loans.
When you file for Chapter 7 bankruptcy, understand how it affects your cosigners. These individuals, often friends or family members, have put their own financial well-being on the line to help you secure a loan. Their generosity shouldn’t be taken lightly, and consider their position as you navigate your financial challenges. You should also consider alternatives to bankruptcy if you are looking to protect cosigners, as we will discuss later.
Understanding Chapter 7 Bankruptcy and Its Impact on Cosigners
Before diving into the specifics of what happens to your cosigner if you file Chapter 7, let’s briefly review what Chapter 7 bankruptcy entails. Chapter 7 bankruptcy, also known as liquidation bankruptcy, allows individuals to eliminate most of their unsecured debts.
In exchange, the bankruptcy trustee may sell some of your non-exempt assets to pay off creditors. Examples of unsecured debts include medical bills and credit card debt. A secured debt, on the other hand, is backed by an asset that a creditor can seize if you don’t make payments, such as a house or car.
When you file for Chapter 7 bankruptcy, an automatic stay goes into effect. This court order stops creditors from pursuing collection efforts against you, providing a level of debt relief. However, this protection doesn’t extend to your cosigners. They remain fully responsible for the debt, even if you’re no longer legally obligated to pay it.
The Cosigner’s Responsibility
When someone cosigns a loan, they agree to take on full responsibility for the debt if the primary borrower doesn’t pay. This commitment doesn’t change when you file for bankruptcy. In fact, your bankruptcy might put your cosigner in a more precarious position.
Creditors, now unable to collect from you due to the automatic stay, may turn their attention to your cosigner. They can demand full payment of the remaining balance, potentially causing financial strain. This situation can lead to damaged credit scores, legal action, and even garnished wages for your cosigner if they cannot meet their payment obligations.
The Impact on a Cosigner’s Credit
Your Chapter 7 bankruptcy filing itself won’t directly affect your cosigner’s credit score. However, if payments on the cosigned debt become late or stop altogether, it can negatively impact their credit, similar to how missed payments can affect the primary borrower.
Late payments, defaults, and collections can all appear on your cosigner’s credit report, potentially lowering their credit score significantly. This negative credit history can make it more difficult and expensive for your cosigner to borrow money in the future, as lenders may view them as a higher risk. They might encounter higher interest rates on new loans, be denied credit altogether, or face challenges renting an apartment.
According to CNBC, a bankruptcy filing can cause a credit score to drop by 200 points or more. While this dramatic drop applies to the person filing for bankruptcy, your cosigner could experience a similar decline if they cannot keep up with payments on the cosigned debt.
Options for Protecting Your Cosigner in Chapter 7 Bankruptcy
While the situation may seem dire, there are steps you can take to minimize the impact on your cosigner when you file for Chapter 7 bankruptcy.
Reaffirming the Debt
One option to consider is reaffirming the debt. This means you agree to continue paying the debt despite your bankruptcy filing. By reaffirming, you maintain personal liability for the debt, which can protect your cosigner from having to shoulder the entire burden.
However, reaffirmation is a serious decision that shouldn’t be taken lightly. Once you reaffirm a debt, you can’t discharge it in your current bankruptcy or any future bankruptcy for several years. It’s crucial to consult with a bankruptcy attorney before deciding to reaffirm any debts.
Continuing Payments Outside of Bankruptcy
Even if you don’t formally reaffirm the debt, you may choose to continue making payments on cosigned debts after your bankruptcy discharge. While you’re no longer legally obligated to pay, doing so can prevent the creditor from pursuing your cosigner for payment.
This approach allows you to protect your cosigner without legally binding yourself to the debt through reaffirmation. However, communicate clearly with your cosigner about your intentions and ability to continue payments.
Please note that if the debt is unsecured, reaffirmation may not be allowed, and you cannot continue paying it until after the bankruptcy discharge
Negotiating with Creditors
In some cases, you may be able to negotiate with creditors to release your cosigner from the obligation. This could involve offering a lump-sum payment or agreeing to a modified payment plan.
While creditors aren’t obligated to agree to such arrangements, some may be willing to negotiate to secure at least partial payment of the debt. This approach requires careful negotiation and a willingness on the creditor’s part to compromise.
The Emotional Impact on Cosigners
It’s important to recognize that the impact on your cosigner if you file Chapter 7 isn’t just about financial consequences. There can be significant emotional repercussions as well. Financial stress can strain even the strongest relationships, and your cosigner may feel a sense of betrayal or anger that you considered bankruptcy.
They may also worry about their own financial security, especially if they are now solely responsible for the cosigned debt. Open communication with your cosigner about your financial situation and bankruptcy plans is crucial. Be honest about your ability to continue payments and work together to find solutions that protect both your interests.
Alternatives to Consider Before Filing Chapter 7
Before deciding to file for Chapter 7 bankruptcy, it’s worth exploring alternatives that might be less damaging to both you and your cosigner.
Debt Consolidation
Debt consolidation involves taking out a new loan to pay off multiple existing debts. This can simplify your payments and potentially lower your interest rates.
If you can qualify for a consolidation loan without a cosigner, this could relieve your current cosigner of their obligation. However, qualifying for a debt consolidation loan with favorable terms typically requires a decent credit history. If you’re struggling with debt, your credit score might already be low, making it difficult to qualify for a better rate than you currently have.
Debt Settlement
Debt settlement involves negotiating with creditors to accept less than the full amount owed to settle your debts. While this can be a challenging process, it might allow you to resolve your debts without filing for bankruptcy and potentially impacting your cosigner.
Debt settlement will likely have a negative impact on your credit score, and any forgiven debt could be considered taxable income by the IRS. Carefully weigh the pros and cons before pursuing this option.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is another option to consider. Unlike Chapter 7, Chapter 13 involves creating a repayment plan to pay off your debts over three to five years.
This type of bankruptcy includes a special provision called the “codebtor stay” that can protect your cosigners from collection efforts during your repayment period. With Chapter 13 bankruptcy, you are given the opportunity to get your finances in order and catch up on past-due payments under the supervision of the bankruptcy court.
FAQs about what happens to my cosigner if I file Chapter 7
Will my cosigner’s credit score be affected if I file Chapter 7?
Your bankruptcy filing itself won’t directly impact your cosigner’s credit score. However, if payments on the cosigned debt become late or stop, it can negatively affect their credit. Late payments, defaults, and collections can all appear on your cosigner’s credit report, potentially lowering their score significantly.
Can my cosigner be forced to pay the entire debt if I file Chapter 7?
Yes, when you file for Chapter 7 bankruptcy, your cosigner becomes fully responsible for the debt. Creditors can demand full payment of the remaining balance from your cosigner.
Is there any way to protect my cosigner if I file Chapter 7?
There are several ways to protect your cosigner, including reaffirming the debt, continuing payments outside of bankruptcy, or negotiating with creditors. Each option has its pros and cons, so it’s important to consult with a bankruptcy attorney to determine the best course of action for your situation.
Can my cosigner file for bankruptcy to avoid paying the debt?
Your cosigner has the right to file for bankruptcy themselves if they’re unable to pay the debt. However, this is a serious decision with long-lasting consequences and should only be considered after exploring all other options and consulting with a bankruptcy attorney.
How common is it for cosigners to end up paying the debt in bankruptcy cases?
According to Bankrate, 38% of co-signers end up repaying some or all of the loans they’ve cosigned. This statistic underscores the significant risk cosigners take on when agreeing to back a loan.
Conclusion
Understanding what happens to your cosigner if you file Chapter 7 is crucial when considering bankruptcy. While Chapter 7 can provide you with a fresh financial start, it can place a significant burden on your cosigners. They may be left responsible for debts they never expected to pay, potentially damaging their credit and financial stability.
Before filing for Chapter 7 bankruptcy, it’s essential to explore all your options and consider the impact on your cosigners. Open communication with your cosigners, coupled with professional legal advice, can help you navigate this challenging situation. Remember, the goal should be to find a solution that provides you with debt relief while minimizing the negative consequences for those who’ve supported you financially.
