Sometimes, borrowers seeking a loan may need a cosigner or guarantor to be approved by a lending institution. Reasons may include not having an established credit history, having no collateral to secure the debt, new businesses seeking funding, or perhaps a hiccup in a credit report such as a record of delinquent payments. Creditors may be willing to loan you money under any of these circumstances, but may require a cosigner or guarantor – typically someone with a higher income, assets and good credit – who will be responsible for repayment if you are unable.
What happens to a cosigner or guarantor if you file bankruptcy?
A bankruptcy only eliminates the filer’s obligation to pay the discharged debts – cosigners and guarantors remain on the hook for the debt. The difference between a cosigner and a guarantor is that a cosigner can step in and continue to make regular payments on the loan, but the guarantor will be required to pay the entire balance. Of course, no one wants to pass along their debt to a cosigner or guarantor after filing bankruptcy, so there are some options to explore.
Protecting Cosigners and Guarantors in a Chapter 7 Bankruptcy
One option under a chapter 7 bankruptcy, is to reaffirm secured debt such as a car loan or mortgage, which means you agree to give up the discharge and resume your obligation to pay the loan. Many who file for chapter 7 bankruptcy consider this option in order to keep their house or an automobile, while discharging credit card or medical debt already, but it also works to relieve the cosigner or guarantor from their responsibility if the creditor is willing to reaffirm the loan to you personally.
Another option to protect your cosigner or guarantor in a chapter 7 bankruptcy is to make payments on discharged debt even though you are not obligated to do so. Instead of having a cosigner step in to make your car payments, you can continue to pay off the loan on their behalf if you are able to. This might not work for a guarantor, who will likely be required to pay the entire balance immediately, but they may be able to make payment arrangements with the creditor which you can informally assume on their behalf.
Protecting Cosigners and Guarantors in a Chapter 13 Bankruptcy
Chapter 13 bankruptcy has stronger protections for cosigners and guarantors of consumer loans in that the automatic stay that protects you against creditor actions, also extends to the cosigner or guarantor of your loan. A chapter 13 bankruptcy allows you to make arrangements to pay off the debt over a 3 to 5 year period which can make all the difference, however, if you do not intend to pay the debt in question off as part of the chapter 13 plan, or you will not be able to pay the entire balance off during the 3 to 5 year period, the cosigner or guarantor will be subject to paying off the balance of the loan.
Contact an Experienced Illinois Bankruptcy Attorney for Help Today
If you are considering bankruptcy protection and are concerned because there are cosigners or guarantors on your loans that will be affected by your decision, it is a good idea to discuss your options with an experienced bankruptcy attorney. Contact the Peoria bankruptcy attorney Charles E. Covey to discuss your options at 309-674-8125.