Filing for bankruptcy is a difficult decision, but sometimes it’s the best option in order to get out from under debt. If you file for bankruptcy and have a joint loan with someone else or a cosigner, then those people will also be affected by the decision.
Co-borrowers vs. Cosigners
Make sure you understand the difference between a co-borrower and someone who cosigns for you. A co-borrower situation is where two people buy one vehicle together. They are both on the title and have equal responsibilities for payments. A cosigner is someone who isn’t on the title, trusts you to pay your loan on time, and puts their credit on the line for you.
In a bankruptcy, the lender can go to the co-borrower or cosigner to pay off the amount owed, and, depending on the type of bankruptcy you file, you may not be able to protect them.
Chapter 7 Bankruptcy
Once a Chapter 7 bankruptcy is filed, creditors aren’t allowed to pursue you to collect debt, but they may go after your cosigners and co-borrowers.
In order to protect these people, you can either reaffirm the debt, continue to make payments, or pay off the debt in full. If you choose to reaffirm the debt, you sign a new agreement with the lender and waive the benefit of your bankruptcy discharge.
Chapter 13 Bankruptcy
If you file a Chapter 13 bankruptcy, your cosigners and co-borrowers will be protected through a “codebtor stay” which protects them from all consumer (non-business) debts. This goes into effect immediately, and creditors can’t collect debts from these people while the stay is in effect.
However, be aware that creditors can get court permission to waive a codebtor stay under specific conditions:
- If the cosigner/co-borrower receives the primary benefit from the loan.
- The creditor’s interest will be harmed during the codebtor stay.
- If your Chapter 13 repayment plan doesn’t propose to include the cosigned debt.
If you have friends and family members who could be impacted by your bankruptcy filing, it’s never an easy situation to handle. If you’re in need of an auto loan after bankruptcy, but don’t know where to start, let Auto Credit Express lead the way. We can connect you with a special finance car dealership in your area free of charge. Start by filling out our free and secure auto loan request form today.