When you are just starting out and have yet to establish your credit history, or you’ve been through some difficult financial times and have some black marks on your credit, having a friend or family member cosign your loan can be exactly what you need. A cosigned loan can give you access to much needed funds or the ability to purchase a necessity such as a car to drive to work. And, if you handle the loan responsibly, it may offer a good opportunity to build or rebuild credit.
However, cosigning can be a risky proposition, both for the person who is taking on responsibility for your loan and for your relationship. If you miss payments or make late payments, those delinquencies will be reported to your cosigner’s credit as well as your own. And, if you don’t pay the debt, creditors may pursue your cosigner for full payment and any interest, late fees, and other costs allowed in the contract.
38% of cosigners surveyed by Princeton Survey Research International Associates in 2016 said they’d ended up responsible for payment for some or all of the debt, and 28% said their credit scores had declined as a result of late payments on the loan they’d cosigned.
Understandably, many people considering Las Vegas bankruptcy are concerned about the impact their bankruptcy filings may have on cosigners.
What is a Cosigner?
Many people mistakenly believe that when a person cosigns a loan, that person is not responsible for payments or the balance on the loan unless the borrower defaults. However, a cosigner is generally actually treated as a co-borrower rather than a guarantor. That means that the cosigner shares all of the responsibilities under the contract with the borrower. The loan will typically appear as an outstanding obligation on the cosigner’s credit report, and he or she is just as responsible for ensuring that monthly payments are made on time as the borrower.
In practical effect, the cosigner’s obligations only kick in if the borrower defaults. But, that is only because as long as someone is reliably making payments, the creditor isn’t concerned about where they’re coming from. Legally and technically, the cosigner is treated no differently than the borrower.
Impact of Default on Cosigners
When the borrower stops making payments on a cosigned loan, the cosigner will face the same type of collection action as the original borrower. This typically starts with a late notice which may be sent as soon as a few days after a payment is missed. If the debt remains unpaid, the cosigner will likely receive debt collection letters and collection calls just like anyone else with past due debt.
If the loan falls far enough behind that the debt is passed to a collection agency, the collection agency will typically pursue action against both the borrower and the cosigner. If the collection action reaches the lawsuit stage, both the borrower and the cosigner will usually be defendants in the lawsuit.
Often, this burden falls harder on the cosigner than the borrower. Even though creditors and debt collectors may treat them equally and they are equally obligated, a person who requires a cosigner may have less at stake. The cosigner, who will typically have well-established credit, may have assets available for seizure, higher wages to garnish, and generally be considered “more collectible” than the borrower.
What Happens to a Cosigner in Bankruptcy?
How a bankruptcy filing impacts a cosigner depends mainly on which type of bankruptcy the borrower files. In a Chapter 13 case, which requires the borrower to make monthly payments to the bankruptcy trustee for the benefit of creditors across 3 to 5 years, the cosigner is usually protected. That’s because the automatic stay that is entered when a bankruptcy case commences extends to the coborrower. The stay usually remains in effect for as long as the debtor fulfills his or her obligations under the plan. If the plan is successfully completed and provides for 100% repayment of the cosigned debt, the stay can protect the cosigner right up to the point when the debt has been fully satisfied.
In a Chapter 7 case, there is generally no protection for the cosigner. Chapter 7 relieves the debtor of the obligation to pay most unsecured debts, but the cosigner remains responsible. Even secured debt may prove more problematic for the cosigner than a debtor who files for Chapter 7.
Imagine that Joe graduates from UNLV and gets a great job, but won’t have any income for a month and has no transportation to get to and from work. He has no credit history, so he can’t qualify for a car loan on his own, and asks his mother to cosign. Among respondents to the survey referenced above, a parent or step-parent over the age of 50 cosigning an auto loan was the most common scenario.
Two years later, Joe loses his great job. He doesn’t have any savings, and he’s taken on additional obligations, so he has past-due rent and a credit card balance on top of his car loan. He decides to file for Chapter 7 bankruptcy and surrender the car. The problem–and it’s a common one–is that the car is worth a lot less than the loan balance. That leaves what’s known as a deficiency balance: an amount still owing after the car is returned. Joe’s obligation to pay that remaining balance is wiped out in the bankruptcy case, but not his mom’s.
Managing Cosigners in Bankruptcy
As you can see, loan delinquencies and bankruptcy filings can have a significant negative impact on cosigners. That’s likely why 26% of survey respondents said cosigning had changed their relationship with the borrower.
If you have a cosigned loan and are concerned about how to minimize damage to your cosigner, it is in your best interest to discuss the options with an experienced Las Vegas bankruptcy attorney as soon as possible. You can schedule a free consultation right now by calling 702-903-1459 or filling out the contact form on this page.