By: John Lee
Often times when a person borrows money, the lender will require the borrower to have a co-signer. The lender requires a co-signer because the lender does not believe the borrower will repay the debt. The co-signer is fully responsible for the debt, if not immediately upon signing the contract, then upon the principle borrower defaulting. Frequently, I see co-signers on bank notes, furniture loans, apartment leases and car loans. In most cases there is no legal distinction between a borrower and a co-signer. In the vast majority of cases, the borrower and co-signer have the exact same liability. Clients will often try to draw a distinction between the person that received the benefit of the loan (the car, furniture, money, etc) and the co-signer (the person that received nothing other than love and affection from the borrower). However, this distinction has almost no meaning when it comes to the lender collecting the debt.
Typically, my client will want to know what will happen to the co-signer when he or she files bankruptcy? Of course this makes sense because the co-signer is usually a parent, sibling or close friend. In the vast majority of cases, the lender will pursue collection activity against the co-signer upon the debtor filing bankruptcy. In most cases, bankruptcy only protects the person filing, and does not offer any protection to the co-signer(s).
The next question is, “will my bankruptcy impact my co-signers credit report?” In most cases, the Lender will report to the co-signers credit report that another party to the account filed bankruptcy. This means the fact that a co-signer filed bankruptcy will show up in the account section of the credit report. The debtor's bankruptcy will not show up in the legal section of the co-signers credit report. Most Lenders understand that a co-signer has little control over a third party filing bankruptcy, and this will not be held against the co-signer. However, if the co-signer does not make arrangements to pay the debt upon the debtor's default; the negative reporting for late payments and default will impact the co-signer's credit report.
The debtor can offer his co-signer a bit of protection by filing a Chapter 13 Bankruptcy. In Chapter 13 bankruptcy the debtor can propose to pay the debt back in full through his Chapter 13 Plan. If the debtor repays the creditor in full through his plan, then the creditor will most likely not bother the co-signer. However, if the debtor only pays back a discounted amount, then the creditor can go after the co-signer for the remaining balance. Also, if the debtor does not pay back the full interest rate in the Chapter 13, the Lender can pursue the unpaid interest from the co-signer. Often a debtor will choose to not file a Chapter 13 bankruptcy to protect a co-signer because the debtor's monthly plan payments would be too high with a 100% creditor repayment. If the debtor does not propose to fully repay the Lender in the Chapter 13 Plan, then the Lender can file a Motion for Relief to pursue claims against the co-signer.
If the debtor wishes to protect his co-signer from negative credit reporting and collection tactics, then the only real solution is to continue paying the debt throughout the bankruptcy and until the debt is completely repaid. If the debtor fails to make the regular monthly payments, the Lender will pursue all normal collection activities against the co-signer; including, seeking a judgment and garnishment of wages. If the co-signed debt is a car or furniture loan, then the debtor can, in most cases, simply keep paying the debt until it is paid off and the co-signer is safe. If the co-signed note is a repossessed car or large credit card debt, then, in most cases, the debtor does not have the means to pay the debt and the co-signer will be facing sever collection tactics including judgment and garnishment. Many times the person in my office seeking to file Bankruptcy is not the primary borrower, but the co-signer that got stuck with the bill when the primary borrower defaulted on the loan.
The ultimate reason that Lenders require co-signers on loans is so that they have someone to pursue for a debt when the primary borrower defaults and files for bankruptcy. The Lenders have a tremendous amount of experience in determining who will repay their debts and who will not. If a Lender requires a co-signer it's because they know there is high probability of default. If your friend or family member asks you to co-sign a loan for them you should know that there is a very good chance that your family member will default on the loan and the Lender will come after you. In many cases, co-signing a loan for a friend or family member is a persons first step towards filing bankruptcy. The attorneys at John W. Lee, P.C. have many years of experience in helping debtors file bankruptcy and stop garnishments. If creditors are harassing you, or you can't keep up with your monthly payments, then call us to set up a free consultation with one of our attorneys.
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