To answer this question, let’s first talk about what I mean by the word “co-signer.” Legally speaking, there is very rarely a difference between the person who signs a loan document first and who signs second. In everyday conversation we all usually refer to the second person as the co-signer. However, in the eyes of the law, it does not matter who signs first or second. Both signers are responsible for the loan. If the creditor cannot collect the money from one signer, then it has the right to collect from the other signer.
Cosigner is Responsible for Your Loans
So, suppose you bought a car and the finance company had your spouse or parent co-sign with you on the loan. Both of you are responsible for paying that loan. If you file a Chapter 7 or Chapter 13 bankruptcy and choose to stop paying for that vehicle, then the loan company will look to the co-signer to keep making the payments. As long as your co-signer keeps making the payments, they should not be effected by your case.
However, if the co-signer stops paying for the loan or refuses to pay, then they will be at risk of losing the vehicle. Filing bankruptcy protects your assets (vehicles, for example) from being repossessed. But if neither you nor the co-signer is paying for the vehicle, then the creditor will be able to lift the bankruptcy protection off of the vehicle so it can be repossessed. The end result is that if you and another person both signed a loan on an expensive vehicle that is hurting your finances, you may both need to file bankruptcy to protect yourselves from that creditor.
Another common situation is where a person chooses to keep and pay for a vehicle through a Chapter 13 bankruptcy, or debt consolidation. Typically, the Court will reduce the interest rate paid on vehicles. This means that the creditor will receive less money overall for the vehicle than they would have gotten outside of the bankruptcy case. If you have a co-signer, be aware that he or she could still be responsible for the difference in these two amounts. However, we can also resolve this problem in bankruptcy by proposing to pay for the vehicle through the Chapter 13 Plan at the contract rate of interest. This can prevent your co-signer from owing anything on the vehicle in the future.
Sometimes co-signers can be effected by a bankruptcy case, but often there are ways to prevent them from being financially harmed. At Bond & Botes we specialize in filing consumer bankruptcy cases in all situations. Our attorneys have years of experience advising people how to make the best of difficult financial situations. We offer free initial consultations at all of our convenient locations in Alabama, Mississippi, and Tennessee. If you are feeling worried about bills and debt collectors, please give us a call to set up an appointment today.
Nick Gajewski is an Associate Attorney at the Bond & Botes Law Offices in Florence and Haleyville, Alabama. He holds a Bachelor of Arts from the University of Alabama, and a Juris Doctorate from the University of Alabama School of Law. Nick joined the team of Bond & Botes bankruptcy lawyers back in 2014 and has been helping clients navigate financial issues since. Read his full bio here.