Cosigners and Bankruptcy

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In William Shakespeare’s Hamlet, Polonius gives his son, Laertes, some advice on how to manage money. “Neither a borrower nor a lender be; for loan oft loses both itself and friend.”

The idea that Shakespeare is illustrating in Hamlet relates very closely to the modern day concept of being a cosigner to someone else debt.  Ever wonder what happens if the guy or gal you cosigned with files for bankruptcy?  How does cosigners and bankruptcy work? Let the Utah Bankruptcy Guy explain:

Many times when someone has a really low credit score and cannot qualify for a loan on their own, or a credit card by themselves, they ask a friend or family member to “cosign”.

“Neither a borrower nor a lender be; for loan oft loses both itself and friend.”

Polonius as quoted in Hamlet

So what is a cosigner?

A cosigner is simply someone who has good enough credit for a loan to be approved through their name.  They act as the bank’s backup in case the original borrower fails to complete their payments. The chance of having to pay someone else’s debt can understandably be a big risk for the cosigner to take.

This risk can become even more daunting if the original borrower decides to file bankruptcy. When a bankruptcy case is discharged the debtor’s debts are usually wiped out. But the bankruptcy will only apply to the original borrower, leaving the cosigner stuck, continuing to pay the payments on the cosigned loan.

Does the kind of bankruptcy matter?

In a bankruptcy filed under Chapter 7 a creditor can continue to collect from the cosigner.  Under Chapter 13 bankruptcy creditors are required pause their collection efforts from the original borrower and cosigner for a time, but only temporarily.

So cosigners and  bankruptcy have a number of ramifications.  They can be good and bad.  Your situation may be unique so consult with an experienced bankruptcy lawyer nearby.  In Utah we help hundreds of good folks in bad situations file for bankruptcy each year.  We also have experience helping cosigners.  Contact us and learn your options today!

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