A co-signer is someone who agrees to repay a loan in the event the primary borrower fails to make payments on the loans. In a lot of cases, a co-signer is needed in order to obtain the loan in the first place this can be due to the primary borrowers insufficient credit history, or poor credit rating.
Most people know that if the primary borrower files for bankruptcy, the co-signer will be solely responsible to pay back the loan, but what happens when the co-signer – the seemingly ‘stable one' – files for a bankruptcy(BK)? Will the primary borrower's credit be affected?
Answer:
The primary borrower's credit won't be affected. Credit reports are tied to an individual, so what your husband, co-signer or joint account holder has done to their credit has no bearing on your credit.
I will say that I have see some lenders report the bankruptcy for the entire tradeline. The reason being, the co-signer is the person who agreed to pay your debt if you defaulted (think joint account). So, both parties are responsible for debt so to speak. If the cosigner filed for a BK the lender sometimes reports the tradeline as if both of you filed. That is inaccurate, the BK won't be in the public records under your name of course, but the way the lender reports the tradeline on your credit will state the BK. You can dispute it for updating, especially if it's current. If it's not current dispute it for deletion since it's reporting inaccurately; you'll still be responsible for paying the debt, however.
If you dispute for updating it should read: “Bankruptcy Joint Debtor” this lets everyone know the co-signer filed and not you. However, you are still responsible for the debt as far as paying it off.
Now, if it is a car or house… things may change based on the terms of the loan and state laws, so I'm hoping you're current on payments if this is the case. I know with mortgages filing for a bankruptcy by a co-signer is considered a default of one of the borrower's mortgage covenants. This can viewed on the mortgage documents under the subheading Covenants/Defaults.
As far as auto loans, again look at your contract/finance agreement. Most finance documents I've seen lists the BK of a co-signer as a breach of contract; or a default. I would suggest refinancing, if you qualify, to pay off the original loan that was co-signed for, so as to avoid any negative repercussions that a lender can enact for the default of the original terms of the finance agreement.
Consult with a BK attorney and Google your state's BK laws to see what debts can and can't be discharged there and possible legal options your lender can take. It doesn't hurt to make them aware early on to protect yourself.
Hope this helps!!!
