Most people cannot afford to obtain a vehicle or home without getting a loan. But applying for a loan can be a tricky process, and lenders have become quite stringent in their eligibility requirements. A cosigner may be necessary if a borrower needs a loan but does not qualify based on their own income and credit records.
A cosigner is an individual – typically a close family member or friend – who legally promises to repay the loan if you do not. This is beneficial for borrowers, as they may get a better interest rate with the additional backing. The lender also benefits, as the cosigner is obligated for the loan just as the borrower is, offering extra assurance that the loan will be repaid.
Co-signing a loan is not risk-free. If the borrower does not repay the loan as agreed, the cosigner will be legally liable – even if the cosigner never drove the vehicle or lived in the home. It should also be noted that if the borrower is delinquent on payments or defaults on the loan entirely. In addition, if the borrower pays late or defaults on the loan, the cosigner’s credit is likely to be negatively affected.
Credit Reports and Cosigners
The cosigner’s credit report will continue to reflect the loan’s payment status.
If the payments are made as agreed – either by the person who filed bankruptcy of their cosigner – the payment history will show current or paid. However, if loan payments cease, the credit report will disclose “no payment” and potentially be referred to collections.
Bankruptcy and Cosigners
Should the borrower decide to file for bankruptcy to relieve themselves of debt, a cosigner may wonder if they will suffer any adverse consequences from the proceeding.
Even though defaulting on a loan may negatively impact the cosigner’s credit, their credit will not be affected by bankruptcy. The bankruptcy is only recorded on the credit report of the individual who filed the bankruptcy.
Therefore, bankruptcy in and of itself is not a problem for a cosigner. However, if the filing party stops making their loan payments and the cosigner does not pick up the payments, their credit will suffer.
Every Lender is Different
Some lenders will stop reporting on the loan after bankruptcy has been filed, meaning that the cosigner may not see negative notations on their credit report. Creditors voluntarily offer credit report data, and they are not obligated to relay nonpayment to credit bureaus.
Because there is no standard way for creditors to report the loan during bankruptcy, it is in the best interest of a cosigner to keep track of the loan status for themselves. Cosigners should talk to the borrower to determine if they are making loan payments, and pick up those payments if necessary to protect their own credit rating. They can also call the lender to identify how they will be reporting the missed loan payments during the bankruptcy.
Asked to Co-Sign? Proceed with Caution
Those asked to be cosigners should assess each situation on its own merits. Is the individual asking you to co-sign responsible, hard-working, and trustworthy? If someone who is not ordinarily accountable asks for help with their loan, you may not wish to proceed unless you are prepared to pay off the loan yourself.
Bankruptcy Help is Available
Call a professional bankruptcy attorney for assistance if you are filing bankruptcy and have a loan you cannot repay. They can help you to negotiate with the lender and determine how the creditor will handle the loan through the process. If you have a cosigner on your loan, alert them to your status so that their credit is not inadvertently damaged.
The law office of bankruptcy attorney Richard V. Ellis is located in Sarasota, Florida.