How Will Bankruptcy Affect a Co-Signer?

A common question that many people ask when filing bankruptcy is how the bankruptcy will affect any co-signers that they may have at the time of filing.  Depending on the circumstances, the impact will differ.  If, for example, two spouses are both filing bankruptcy together and they are co-signed on a number of shared debts, then the fact that they are co-signers with one another will not have a significant impact on the bankruptcy.  Alternatively, if you are filing bankruptcy and have a co-signer who is not also filing, the impact on the co-signer will be different than it would for two spouses filing jointly.   

While the specific language in different loan agreements will vary, in most circumstances the signer and co-signer for a loan are both independently liable for the entire balance.  This means that when the loan is taken out with the lender, both the signer and the co-signer are agreeing that they will be fully responsible for the balance of that loan.  Outside of a bankruptcy, the way that this usually works is that a creditor could expect either the signer or the co-signer to make payments on this jointly held loan.  

When the bankruptcy discharge goes through, it eliminates the personal liability of the person who filed it, but does not affect the liability of any co-signers that they may have.  Thus, after the discharge, the co-signer will still be attached to the loan in the same way that they were before the bankruptcy filing, but the person who has filed and received their bankruptcy discharge will no longer be liable for the balance.  

However, there are a few exceptions to this.  The most common one applies to secured loans that the person filing bankruptcy intends to continue making payments on, such as a mortgage or a car loan.  In this instance, the filer will often have the opportunity to reaffirm this secured debt, which means that the debt will not be discharged if the person filing bankruptcy agrees to reaffirm it.  

Another thing to consider is that a co-signer can always declare bankruptcy too!  If you have declared bankruptcy and discharged your own liability on a debt, this does not mean that the co-signer cannot also file their own bankruptcy to eliminate their liability as well! 

The bankruptcy discharge is a powerful tool that can offer significant relief to anyone dealing with unmanageable debts, and this remains true for those who might have a co-signer for one or more these debts.  Our attorneys are highly experienced and will be more than happy to advise you on the different paths that you can take through the bankruptcy process, as well as assist you in finding the one that works best for you and your specific circumstances. 

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 When the time is right, or when you are ready, please don’t hesitate to reach out to Minnesota’s most kind and helpful bankruptcy law firm by going now to www.lifebacklaw.com.