Cosigning & Bankruptcy

Consumer Debt

People with credit problems may have trouble getting loans for consumer purchases, such as cars or credit cards, without a co-signer. Parents or other relatives and friends may choose to co-sign loans to help out. Consider carefully if you want to do this; there is a reason that the bank will not loan the money without a co-signer. If the borrower files for bankruptcy, you will be on the hook for the entire amount of the loan, including any fees or deficiency balances after repossession. The bank will do everything it can to collect this money from you, while the original borrower won't have to pay.

Student Loans

Student loans are treated differently than consumer debt. A student loan cannot be discharged in a bankruptcy action. If a borrower files for bankruptcy, he will still need to pay any federally guaranteed student loans. If you co-signed the loans, you are still liable as well, and you could not discharge your obligation with a bankruptcy if you were to choose to file.

Mortgage Debt

Mortgages are treated much like other consumer debt but do have some key differences. Many borrowers reaffirm their mortgages in bankruptcy, which means they promise to pay them just like before the bankruptcy to keep living in the house. If the borrower doesn't reaffirm the mortgage, he may still choose to live in the house and make the payments. As long as this continues, you should have no problems. The borrower would not be responsible for the debt if he stops paying. In that case, the bank will foreclose and attempt to collect any balances not cleared by a foreclosure sale from you.

Divorced Couples and Bankruptcy

Married couples are co-signers for each other on any loans that they have together. If the couple divorces, the divorce decree does not change the couple's obligations on their loan agreements. If the divorce decree states that the husband is responsible for paying the debts, but the debts are not refinanced into the husband's name only, the wife is still responsible. If the husband files for bankruptcy and is discharged, he is no longer responsible for any of the debts legally, but the wife is still responsible. However, since the divorce decree said the husband was supposed to pay, the divorce judge can hold him in contempt for not following a court order. In the meantime, the creditors may use all of their resources, including lawsuits, to collect from the wife.