Over the years that I have been practicing bankruptcy law, I have seen a marked increased in the level of bankruptcy knowledge that potential clients bring to a their bankruptcy consultation. To be honest, I have had some bankruptcy clients that would make pretty darn good bankruptcy attorneys – if they came to me with bar card in hand, I would hire them on the spot. No reservations. I blame the Internet.
However, there are sticky topics that seem to always cause confusion, regardless of how much reading is done. These topics inherently reinforce the need for a good attorney. For family law, the concept of “common law’ is about as sticky as it comes. For bankruptcy, filing with cosigners is like molasses on a hot day – just plain sticky.
I have attempted to break down the basics of cosigner law below. Keep in mind that I am only just scratching the surface. For a thorough explanation of topics like this, I recommend a bee-line to your local bankruptcy attorney.
What is a cosigner?
When you apply for a loan with less than ideal credit, the lender may request for a cosigner. A cosigner is a someone that agrees to accept responsibility for the terms of loan if you can no longer pay it. Cosigning on a loan requires accepting legal responsibility for the terms of the loans, and should not be taken lightly. A cosigner must be prepared to repay the loan if the primary borrower cannot do so.
Why NOT to cosign on a loan
As a bankruptcy attorney, I have seen my far share of good loans gone bad. Nobody buys a car or rents an apartment with the intention of paying that debt. Unfortunately, circumstances change and many borrowers find themselves unable to pay. This is where cosigners get into trouble. In the case of default, a cosigner must choose one of two options. They can either pay the loan to prevent collection efforts or the can allow the default to occur. Given that most cosigners are friends or family, you can imagine that this leads to pretty strained diner conversation.
Chapter 7 bankruptcy and cosigners
Filing for chapter 7 bankruptcy eliminates your personal liability from debts deemed “dischargeable” by the bankruptcy court. However, it does not eliminate the liability of any cosigners you may have on your loans. When your debt is discharged, the liability of that loan is transferred completely to the cosigner, leaving them responsible to pay the debt.
Depending on the terms of your loan, this could leave your cosigner in a world of hurt. This is why it is important to have a serious conversation with your cosigners prior to default or filing for bankruptcy protection.
Chapter 13 bankruptcy and cosigners
Chapter 13 bankruptcy is a friendlier option for those filing bankruptcy with cosigners. This is because chapter 13 of the bankruptcy code provides both for a partial repayments of the debt through the bankruptcy plan and for a codebtor stay to halt collection efforts with the debt is being repaid.
Unfortunately, this is where the whole “sticky as molasses” comes into play. If you are considering filing for bankruptcy protection and are concerned about the effect it will have on your cosigner, contact an experienced Phoenix bankruptcy attorney today.