So often when someone needs to make a large purchase they must take out a loan. The vast majority of us, myself included, have to incur debt to make these large purchases. For many of us, getting this loan is going to require a cosigner. A cosigner is an additional person (besides you) that will agree to be liable for the debt in the event that you default on the loan and stop making payments. The cosigner, just like you, is expected to pay back the loan in full if the other part can’t or won’t. What happens though, when your co-signer files bankruptcy? How is that going to impact your role as the primary borrower?
The best way to explain this situation is to give you an example. Becky is looking to buy herself a new boat. Becky’s credit isn’t good enough to get the loan for the boat without a cosigner. Becky’s cousin, Tammy agrees to be a cosigner on the loan but won’t be listed on the title as an owner of the boat. A few months later, Tammy has to file for bankruptcy and through the bankruptcy process, Tammy is remove from the loan and no longer required to pay it back. You ask, what happens to Becky and her boat now?
Becky still has to pay back the loan. As the primary borrower, she still owes the balance of the loan. If Becky pays the loan back in full, the boat is hers, free and clear. The only issue with being the primary borrower and the cosigner in a finance contract like this is that eventually the property will be titled in the primary borrower’s name. Issues can occasionally arise if the finance company declares the loan in default due to the cosigner’s bankruptcy but these can usually be remedied by refinancing the loan in solely into the name of the primary borrower. This can even result in lower payments for the primary borrower.
Additionally, Tammy’s bankruptcy shouldn’t show up on Becky’s credit. Occasionally, situations arise where this is reported to credit bureaus but they can usually be resolved by filing a dispute letter with the three credit bureaus. Our advice is usually this: don’t cosign. If you can’t afford to buy something using your own credit, maybe you need to explore less expensive options.
If you find yourself in financial trouble due to cosigning a loan with someone else, contact the attorneys at Harmon and Gorove today to see how we can help mitigate the damage of cosigning a loan.