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How will filing bankruptcy affect my cosigner?
The short answer is that you filing bankruptcy will damage your cosigner’s credit. How much damage? You won’t know until after you file.
Most bankruptcy attorneys will not tell you this truth. I recently engaged in a Facebook conversation on this topic with fellow consumer bankruptcy attorneys from other parts of the United States and received some good feedback.
One attorney explained that they avoided this topic with their clients but if the client asked the question, their answer would be “I only represent you and not your cosigner.”
The reason I think this is an incomplete answer is that it does not address the obvious future storm that will come down the pike.
In most consumer bankruptcy cases I see, the cosigner is almost always a relative or a super close friend. Imagine how upset a cosigner/relative/friend will be when they go to buy a new car and they get denied because their credit score was unexpectedly lowered. This kind of surprise always ends with someone getting upset and could severely damage a relationship. Personally, I think things go much better to warn the cosigner before the case is filed.
Another attorney in my Facebook conversation joked that he would tell his client, “Wow, look at that car in the parking lot.” In other words, don’t have the conversation. Again, I think this is a bad idea because it will have to be addressed at some point. Bad surprises are best to be avoided.
What can a cosigner do to avoid the damage?
In most cases, when someone is coming to file bankruptcy they are usually behind on all of their bills and the damage has already been done. In a case where payments are current on a cosigned debt, the consigner can (1) pay off the debt to avoid damage to their credit or (2) refinance the debt 100 percent in their name only. Option two is unlikely because most creditors like having their claws into two people to ensure payment.
Do you have to tell the cosigner about the bankruptcy?
The Bankruptcy Code requires you to list the name and address of the cosigner in the petition. The cosigner will get notice of the bankruptcy filing. Twenty years ago, I remember this client from Gainesville Georgia who was quite a character. He told me that he was not going to tell his girlfriend ahead of time and would just wait until later. In his case, we had to get it filed to quickly to stop a repossession. When the girlfriend found out after the fact, you can imagine her rage. Whoever came up with the phrase “forgiveness is easier to obtain than permission” should be violently slapped in the face because it is not true. The client came to my office begging me to fix the situation because he was going to lose the love of his life. There was nothing I could do after the fact.
In a Chapter 13 bankruptcy case, we can use the cosigner protection provision to protect the cosigner from harassment and lawsuit when we pay the cosigned debt at 100 cents on the dollar along with applicable interest. However, even in a case where we are utilizing the cosigner protection provision, we cannot protect the cosigner’s credit rating.
To the cosigners of the world, I would like to say the following:
- Please don’t end a friendship or ruin a family relationship because you made the decision to cosign a loan.
- If the debt gets fully paid in a Chapter 13 bankruptcy case, consider yourself lucky that the only damage to you is a lower credit score.
- Life happens. 99 percent of the bankruptcy cases that get filed are because something happened that was out of the person’s control. Covid 19 is not their fault. Millions of people have lost their job because of it. When their spouse left them with a pile of bills with kids to raise, it was not their fault. When they got cancer and ran up huge medical bills, it was not their fault.
- Be merciful. James 2:13 states, “Judgment will be merciless to the one who has shown no mercy. Mercy triumphs over judgment.” (Cobra Kai people are going to be in big trouble on judgment day. If you have not watched the show on Netflix, you are missing a good one.)
- Lastly, don’t ever cosign for anyone ever again in your life. It is always a bad idea.