The bankruptcy process has the potential to give you a fresh financial start. But it can also have unforeseen outcomes that can disrupt your existing relationships if you’re not careful. One example is how the bankruptcy process can affect those who have co-signed on your loans. Before choosing a bankruptcy option that’s right for you, you might want to understand how your cosigners would be affected so that you can more competently navigate the process.
How personal bankruptcy affects loan cosigners
At first glance, you might think that personal bankruptcy would free you and your cosigners from existing loans that are subjected to your bankruptcy petition. But this isn’t the case. In fact, in a Chapter 7 bankruptcy, while you may be relieved of your debt obligation, your cosigner will remain on the hook, left to carry the debt on their own. In a Chapter 13 bankruptcy, your cosigner may enjoy what’s known as a co-debtor stay, but if you fail to adhere to your bankruptcy payment plan, then that cosigner will be obligated to repay the debt in question.
What options exist to protect a cosigner during bankruptcy?
There are a few. The cosigner can file for bankruptcy with you, which would provide them with the same protections you receive, or they may be able to work with creditors to modify existing loan terms. In some instances, a creditor may even be able to successfully seek release from the debt in question before the bankruptcy process begins. Either way, you and your cosigners need to explore these options before moving forward.
Pursue bankruptcy informed and confident
We know the thought of bankruptcy can be scary. But there are steps you can take to make the process more easily understood and manageable. Your bankruptcy attorney may be pivotal here, which is why it’s good idea to discuss your circumstances with them before proceeding.