Has the risk of co-signing a loan ever crossed your mind? Co-signers may be in a vulnerable position due to the intersection of state and federal bankruptcy regulations.
Co-signer liability in bankruptcy
When the primary borrower files for bankruptcy, the co-signer’s liability largely depends on the type of bankruptcy. In Chapter 13 bankruptcy, for instance, a “co-debtor stay” temporarily halts creditors from pursuing the co-signer while the borrower follows a court-approved repayment plan.
However, this protection has limits. If the borrower fails to stick to the plan or if the repayment does not cover the full amount owed, the co-signer remains on the hook for the outstanding balance. In contrast, Chapter 7 bankruptcy offers no such protection, and creditors can immediately seek repayment from the co-signer.
Rights of the co-signer
Co-signers have limited rights in a bankruptcy scenario, but they can get certain notifications and actions. If the primary borrower files for bankruptcy, the court has to inform the co-signer.
This awareness allows the co-signer to consider their options, which may include negotiating with the lender to settle or restructure the debt. In some cases, paying off the loan in full might be the best way to avoid further collection efforts and potential damage to the co-signer’s credit.
Understanding the responsibilities and risks of co-signing a secured loan
Approaching the role of a co-signer with caution is essential for safeguarding your financial future. Being well-informed and mindful of the responsibilities involved can help you make a decision that aligns with your long-term financial goals.