Does Bankruptcy Affect My Cosigner’s Credit?

At the Pelley Law Office, our bankruptcy attorneys understand that financial challenges often involve more than just one person. If you have a loan with a cosigner—whether it’s a family member, friend, or business partner—filing for bankruptcy can impact them as well.

Many people are surprised to learn that, even if a cosigner has a spotless payment history, your bankruptcy may still affect their financial standing. Call us today at (972) 605-0335 or contact us online for additional help with any questions you might have.

How Cosigners Are Connected to Your Debt

When someone cosigns a loan for you, they agree to take full responsibility for the debt if you cannot pay. This legal obligation means the lender can pursue the cosigner for payment, regardless of your financial circumstances. The lender’s primary concern is collecting the money owed, and they have the right to seek it from either party on the loan.

If you file for bankruptcy, your obligation to repay the debt may be discharged, but your cosigner’s obligation usually is not. Unless your cosigner also files for bankruptcy, the creditor can, and often will, turn to them for payment.

The Impact on Your Cosigner’s Credit

A cosigner’s credit may be affected in several ways when you file for bankruptcy:

• Late Payments Before Filing — If you were behind on the loan before bankruptcy, those late payments are likely already reported on the cosigner’s credit history.
• Collection Activity After Discharge — Once your obligation is discharged, lenders may begin aggressive collection efforts against your cosigner. If they fall behind, their credit score will drop.
• Increased Debt Load — The added financial responsibility can raise your cosigner’s debt-to-income ratio, making it harder for them to qualify for future loans.

Special Considerations in Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy, there is a provision called the “co-debtor stay.” This provision temporarily prevents creditors from pursuing your cosigner while your repayment plan is active. However, this protection lasts only if the repayment plan includes the debt in question and you remain current with the payments. If the debt is excluded or payments lapse, creditors can ask the court to lift the stay and resume collection efforts.

Protecting Your Cosigner

If you are concerned about your cosigner’s financial health, there are steps you can take:

• Continue Payments on the Cosigned Loan — Even if other debts are discharged, paying the cosigned loan can protect your cosigner from harm.
• Reaffirm the Debt — In some Chapter 7 cases, you may choose to reaffirm the loan, keeping it out of the discharge process. This means you remain legally responsible for it.
• Consider Refinancing — If possible, refinance the loan into your own name before filing for bankruptcy.

A Bankruptcy Lawyer is Standing By

Your bankruptcy will not automatically ruin your cosigner’s credit, but it can create serious financial consequences if the debt is left unpaid. Addressing the issue early, before filing for bankruptcy, can help protect important relationships and minimize damage to your cosigner’s financial future.

If you are considering bankruptcy and want to understand how it might affect your cosigner, the bankruptcy attorneys at Pelley Law Office can guide you through your options. We offer free consultations and bring over 80 years of combined experience helping Texans make informed financial decisions. Call us today at (972) 605-0335 or contact us online.