What happens to a cosigner in bankruptcy?

Applying for a loan can be a complicated matter if an individual already has debt. That is why, in many cases, individuals will obtain a loan by cosigning with someone else. A cosigner is often a family member or even a close friend.

Cosigned loans are very common – but what happens to cosigners if individuals file bankruptcy?

Cosigners are still responsible for the debts

In most cases, most personal bankruptcies involve one person – the individual who files for debt relief. Therefore, the bankruptcy discharge eliminates that individual’s responsibility to pay the debts discharged.

That is not the case for the cosigner. When someone cosigns a loan, they agree to take on responsibility for and pay the debt if the individual taking out the loan cannot repay it. They are often still responsible for the debts if the other signer cannot pay or is discharged of their responsibility to pay.

The situation varies depending on which chapter you file

Cosigners remain responsible to repay debts regardless of whether individuals file Chapter 7 or Chapter 13 bankruptcy. However, cosigners face different situations depending on which chapter of bankruptcy individuals file:

  • In Chapter 7 bankruptcy, cosigners are still responsible for any balances due on the debt; but
  • Chapter 13 bankruptcy involves a codebtor stay. Essentially, this means that the automatic stay applies to the cosigner as well. They are responsible to repay the debt, but creditors cannot pursue repayments while the automatic stay is in effect.

Make sure cosigners stay informed

New Mexicans facing overwhelming debt can pursue bankruptcy whether or not they cosigned a loan with a family member. However, it is often beneficial to inform cosigners about their bankruptcy and keep them updated throughout the process.