How Bankruptcy Affects Co-Signers

Co-signing on loans is a part of everyday life for many individuals.  Creditors love co-signers because it gives them multiple sources of recourse if the loan ever defaults.  Often times it does not matter who is the primary vs. secondary because creditors are free to collect from either party, as long they signed for the loan.  The act of signing for the loan affirmatively states that you are making yourself responsible for the payment.

This simple situation can become more complicated if one of the co-signers files for bankruptcy.  The most important factor that determines how a non-filing co-signer, or the Non Debtor (“ND” ) is affected by the bankruptcy is how the filing co-signer or Debtor (“D”) is treating the loan/asset in question. If D is going to keep the asset and continue paying for it, than ND is not affected in most cases (this depends on factors such as the chapter of bankruptcy filed by D and other details in their case. Consult with an attorney for a more detailed analysis).  If D is surrendering the asset/debt than ND is affected.  The creditor is now limited to seeking recourse from only ND and/or the recovery of the asset.  Now ND has a decision to make.  If ND intends to keep the asset/debt then ND must make the payments to the creditor on time.  If ND is no longer interested in keeping the asset/debt then he can choose to let the Creditor take the property in question (via repossession or foreclosure action depending on asset type).  However, if the sale of the asset after repossession/foreclosure results in a deficiency (meaning that the amount recovered is less than the amount owed (including costs, attorney fees, interest, etc.)) then ND is the sole person responsible for this amount.  ND must make payments or ND may have to consider filing a bankruptcy of his own.

If you are facing a situation similar to this please use the contact us box to send us your question with contact information and we will reach out to you.  We would be glad to offer you a free no-obligation consultation to discuss your situation in detail.  ​

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