
Getting a loan can be an incredibly difficult process for those who do not have a high credit score or extensive credit history. As such, many creditors allow co-signers to help those looking to receive a loan. If you have been asked to co-sign a loan for someone, it’s imperative to understand what this means and what can happen if the original signer files for bankruptcy. The following blog explores what you should know about these matters and why consulting with a Memphis, TN consumer bankruptcy lawyer is in your best interest during these matters.
What Are Co-Signers?
When someone has fallen on hard times or does not have an extensive credit history, it can be hard for them to obtain a loan. As such, if you have a good credit score, they may ask you to co-sign a loan with them. This is especially common with parents helping their children receive student loans or lease a car, but can also occur between other relatives and even friends.
Co-signing is a great way for those who need help to rebuild or establish their credit. However, it can pose many risks for the co-signer. If the original signer is late on their payments, it can negatively reflect on your credit report, which can impact your ability to receive loans or mortgages. Additionally, if the borrower defaults, the creditor can legally pursue collection efforts against you.
How Can Bankruptcy Impact Me if I Co-Sign?
If the person you co-signed a loan for files for bankruptcy, it’s important to understand your responsibilities during this matter. As you will be just as responsible as the original signer for missed payments, it’s important to understand that bankruptcy can significantly impact you. However, its impact will depend on the type of bankruptcy they file.
When the person files Chapter 7, the creditor looking to collect the money owed will be unable to pursue the filer for the funds owed, as they are granted an automatic stay. As such, this allows collection against the co-signer. However, if the filer is current on their payments, they may choose to make reaffirmation agreements. This will prevent the creditor from pursuing collections against the co-signer.
If the original signer decides to pursue Chapter 13, there is slightly more protection for the co-signer. Under Chapter 13, the automatic stay extends to protect the co-signer from collection effects. In addition, there is a three to five-year repayment plan the original signer will enter, and the automatic stay will last the entirety of that period.
As a cosigner, you will be responsible for paying back the remainder of the loan, even after a bankruptcy discharge. However, this will not impact your credit score unless you refuse to pay.
When you are asked to co-sign a loan for someone, it’s imperative to understand the risks associated with doing so. If you are unsure whether or not this is in your best interest or you co-signed a loan and the other party has filed for bankruptcy, it’s in your best interest to connect with an experienced attorney from the Arnold Law Firm. We understand how complicated these issues can be, so we will do everything possible to help you. Connect with us today to learn more.