What happens to your cosigner if you file bankruptcy depends on which type of bankruptcy you file: a Chapter 7 or a Chapter 13. No matter which type of bankruptcy you file, know that it can be difficult to protect a cosigner during it.
Your Cosigner in a Chapter 7 Bankruptcy
At the end of a successful Chapter 7 bankruptcy, most of your debt that hasn't been repaid to creditors through the sale of your nonexempt assets is wiped out at discharge. This process only erases your liability for a debt, such as a car loan, and not the debt itself.
If you have a cosigner, the creditor is free to recover any balance from them. In fact, your creditor may begin going after your cosigner to collect their debt as soon as you enter into a Chapter 7 – the automatic stay you're granted doesn't extend to your cosigner.
The only way you can spare your cosigner is to reaffirm your loan, continue to make timely payments without reaffirming, or to pay off your auto loan.
Should You Reaffirm Your Debt in a Chapter 7?
If you choose to reaffirm your loan, you lose the benefit of bankruptcy protection – none of the debt gets wiped away at discharge. However, doing this ensures you're also responsible for the debt along with your cosigner. Reaffirmation requires you to sign a new loan agreement, which makes you responsible for the loan.
You must keep up with all of your payments if you reaffirm until the loan is paid off, even after your bankruptcy discharge. A missed payment could result in repossession, and, worse yet, you can be sued for any deficiency balance following the sale of the vehicle.
If you choose not to reaffirm your loan, you may still be able to keep your car if it's allowed in your state, as long as you're up to date on the loan and continue to make on-time payments.
This protects your cosigner, because if you keep up with your payments, a creditor has no reason to start collection action. If you don't reaffirm and your vehicle is repossessed, your cosigner is liable for a deficiency balance.
Your Cosigner in a Chapter 13 Bankruptcy
If you file for Chapter 13 bankruptcy, there's less risk for your cosigner, but it's not automatic. Just like a Chapter 7, an automatic stay goes into effect in a Chapter 13, which prevents creditors from coming after you to collect a debt. Unlike a Chapter 7, however, you have the option to protect your cosigner in a Chapter 13 by filing a codebtor stay.
A codebtor stay prohibits creditors from going after your cosigner as long as your auto loan is included in your repayment plan, it's being paid as agreed, and the stay remains in effect. Creditors, however, can ask the court to lift this stay if they feel it's necessary.
Protecting Yourself, and Your Cosigner
The best way to ensure that your cosigner is safe in the event of a bankruptcy is to file a Chapter 13. If you're looking for a shorter process, you need to file a Chapter 7, which typically lasts around three to six month (compared to either three or five years for a Chapter 13). Just know that it's more difficult to protect a cosigner in a Chapter 7.
Once you've come out of bankruptcy with a discharge, no matter which type you filed, you can rest assured that there are dealerships and lenders available if you need a car loan – with or without a cosigner. In fact, you don't even have to wait until your bankruptcy is over if you take the proper steps in some cases!
At Auto Credit Express, we work with a nationwide network of dealers with just the type of lenders to help you during or after a bankruptcy. Just fill out our fast, free, and secure auto loan request form, and we'll get right to work matching you with a local dealership.