In order to obtain a loan, whether it is a personal, car, mortgage or other financial loan, often times it proves necessary for individuals to utilize a co-signer. Co-signers are necessary if the applicant does not have strong enough credit in order to receive the loan, or the co-signer just helps reduce the overall interest rate applied to the loan.
However, the co-signer is not just a name signed to the bottom of the loan documentation.The co-signer is actually responsible for any defaulted payments, should the applicant fail to pay back the loan on time. This is why the lender is able to reduce the interest rate and grant the loan, as the lender is more likely to receive the funding back.
Should the applicant fail to pay the loan back and eventually file for bankruptcy, it is necessary for any co-signer to know and understand what might happen, should either Chapter 7 or Chapter 13 occur.
Co-Signer Responsibilities: Chapter 7 versus Chapter 13
There is a rather large difference between Chapter 7 and Chapter 13, so not only does this filing greatly affect the former applicant, but it also affects the co-signer as well. When the applicant files for bankruptcy, it allows the person to discharge the obligation towards paying the specified debts. When filing for bankruptcy, the impact on the co-signer has alternating affects, depending on the kind of chapter is filed.
There is a varying amount of protection though when the applicant files for bankruptcy, so any co-signer must not only be made aware of any applicant filing for bankruptcy, but whether it is Chapter 7 or 13.
If the application files for Chapter 7 Bankruptcy, the individual discharges all debts they are obligated to pay. However, it does not protect any co-signers, so debt collectors and creditors are able to pursue these individuals in order to collect on the debt.In order to protect the co-signer, it is important for the applicant to confirmthe debt. This gives up the benefit and production of filing for bankruptcyand means the applicant must pay back the debt, not the co-signer.
The only way to really protect the co-signers and the applicant at the same time, the applicant must continue to pay off the debt after Chapter 7. The repayment period is made easier and the co-signer is off the hook.
Chapter 13 is far more beneficial for the co-signer. When the former applicant files for Chapter 13, the co-signers are protected from creditors due to the Chapter 13 codebtor stay. Creditors are able to request the court to remove the protection if the the applicant is not attempting or proposing to pay the debt in full through Chapter 13, or the creditor is going to suffer irreparable damage if the debt is not paid back.
There is no guarantee the judge agrees with the creditor, but it does leave a few windows open for co-signers to possible stay on the hook for paying back some, if not all of the debt. A co-signer is able to help a loan applicant not only obtain the loan but reduce the interest rate. However, should the applicant eventually file for bankruptcy, it may directly affect the co-signer as the individual can find themselves responsible for paying back the loan.
There is a large difference between Chapter 7 and Chapter 13, so a co-signer must know what may happen to them, should the applicant default. Knowing this information may ensure co-signers think carefully before helping out an applicant secure a loan in the future.
Author’s Note: Christian Younger is a bankruptcy lawyer at Friend Younger for the Sacramento and Modesto communities.