Have you ever considered cosigning a loan for a responsible family member in the past? It’s a common practice. Parents often cosign for their grown child’s first car; children might cosign for a smaller house for their retired parents. Grandparents, cousins, uncles, aunts, and many other relatives may have cosigned for loans for each other throughout the years.
This practice does have one fatal flaw, however, and that flaw could leave you saddled with the entire debt.
Bankruptcy Impacts Others
When we talk about bankruptcy, we use terms like “discharged” and eliminated debt. To us, it sounds like the debt just disappears, poof! But the truth is that the debt still exists. All that happens is that the court declares that you don’t have to pay it. In most cases, the creditor absorbs the debt, taking a hit to their bottom line, and everyone moves on.
But, if someone else was connected to the debt, someone who the court hasn’t declared is free from paying the debt, the creditors will turn to them to pay off the still-existing debt. This means that if you have co-signed for a car, a house, a credit card, or anything else at all, and the other person declares bankruptcy down the line – you can and likely will be stuck with paying that debt.
This also means that if you are the person filing bankruptcy, and your parents or other relative has ever co-signed for you, you could be sending your creditors after them.
The Type of Bankruptcy Matters
This is all true if you file a Chapter 7 bankruptcy in NYC. If you choose to file a Chapter 13, the story is different. The Chapter 13 has a “codebtor stay” that works just like the automatic stay, protecting anyone who has signed for the debt from creditor action. The only reason that a creditor could get around this would be if you are not proposing to pay them in full during the Chapter 13 bankruptcy.
Other Effects of a Cosigner Filing Bankruptcy
Many people have woken up one day to find their credit score lowered because their parents or child filed bankruptcy without them knowing. This action meant that the co-owned debt could no longer be paid, and was reported to credit bureaus as defaulted. Credit bureaus then report your credit score as lower. This can be contested with the credit bureau, and an experienced bankruptcy attorney in NYC can help you get your credit report clean again.
Be aware that this is something that can happen to any cosigners you have if you are planning to file bankruptcy. It is always a good idea to let them know, so that they can monitor their credit score and get any faulty information removed as it shows up.
What Can You Do?
The only way to stop a creditor from going after a co-debtor is to take care of the debt. Even after a bankruptcy is over, you aren’t banned from voluntarily paying off a debt.
Experienced Attorneys Warn You of This
If you are considering filing bankruptcy, a good attorney should make you aware of this risk. If you were not aware, and you have been working with your attorney already, then you may need to consider a more experienced legal counsel next time.
If you are interested in learning more about bankruptcy, or you need help keeping your credit score high in a situation like this, call our office. We specialize in bankruptcy law for NYC and the surrounding areas. I can be reached at 212-244-2882.