Impact of a Co-Signer’s Bankruptcy on a Car Loan
When a co-signer on a car loan declares bankruptcy, this can significantly affect the loan and the borrower's financial situation. This article will explore how bankruptcy affects co-signers and the loan in depth, discussing the differences between Chapter 7 and Chapter 13 filings, and the potential impacts on credit scores.
Understanding Co-Signers and Bankruptcy
A co-signer is involved in a loan to provide additional creditworthiness to the primary borrower. In cases where a co-signer declares bankruptcy, the loan's status changes based on the type of bankruptcy filed. Specifically, a co-signer's bankruptcy filing may result in the termination of the loan if the auto finance company decides to chase the co-signer for collection purposes.
Automatic Stay Protection
When a co-borrower files for bankruptcy, the automatic stay protects the borrower from creditor actions. This stay can extend to the co-borrower in most cases, but under Chapter 7 and Chapter 13 bankruptcies, the protection varies:
Chapter 7 Bankruptcy
Under Chapter 7 bankruptcy, the automatic stay does not extend to co-signers and guarantors. Creditors may pursue the co-signer for collection. This can occur even if the borrower is making timely payments.
Consequence for the Co-Borrower
The co-borrower may be required to take over the loan if the primary borrower is unable to continue making payments. If the co-borrower files bankruptcy, the loan might be considered "surrendered," and the co-borrower becomes the sole liable party.
Options for Co-Borrowers
The co-borrower has several options if the co-signer files for bankruptcy:
Reaffirmation: This is an important decision that involves agreeing to remain responsible for the loan, even in a bankruptcy. You cannot discharge the debt in a future bankruptcy. Continue Making Payments: The co-borrower can chose to continue making payments and be responsible for any missed payments. This ensures the loan stays current and the co-borrower's credit remains unaffected.Chapter 13 Bankruptcy
Under Chapter 13 bankruptcy, the automatic stay provides greater protection to co-borrowers. Upon filing for Chapter 13, the cosigned financial obligation can continue to be paid, and the co-borrower may qualify for additional stay protections called the "co-debtor stay."
Protection Against Collection
As long as the co-borrower is making timely payments, the bankruptcy filing will not affect them. If the primary borrower misses payments, the co-borrower is protected by the stay during the bankruptcy period. If the full amount is paid back through the bankruptcy plan, the co-borrower will not be affected. If not, the co-borrower remains responsible for continuing payments.
Impact on Credit Scores
The bankruptcy filing of one party does not necessarily reduce their creditworthiness. However, the co-borrower must ensure the loan is kept current to maintain their credit score. Missed payments will negatively impact both co-signers' credit scores, as they are considered a single entity by credit bureaus.
Conclusion
While a co-signer's bankruptcy can have significant repercussions for a car loan, the impact varies depending on the type of bankruptcy and the actions taken by the co-borrower. Understanding these nuances can help protect both parties involved in the loan. It is crucial for co-borrowers to stay informed and keep track of payments to avoid potential issues caused by a co-signer's bankruptcy.