Cosigning for Loans: Cons Outweigh the Pros

by Hermin Dowe on October 27, 2014

In today’s America, more and more things that used to be available to the masses are becoming further out of reach. Cars, homes and sometimes university education are all requiring young people to take out loans. And sometimes, one’s credit is not good enough. Cosigners on a loan improve the odds of it being granted - but unless the cosigner knows what they are getting into, they can be in for major problems down the road. It is important to get the truth before committing.

Cosigners in Chapter 7 and 13

In Chapter 7 bankruptcy, it must be very clear - your cosigner is still liable for your debts if you file for Chapter 7 protection. However, their degree of liability differs between secured and unsecured debts. With an unsecured debt such as a personal loan, if you file for Chapter 7, your cosigner is liable for the full extent of the debt that has not already been repaid. This can be problematic - and can even end friendships, depending on the size of the debt. You are in effect torpedoing your friend or family member’s credit if they are unable to pay.

With a secured debt such as a car loan or mortgage, your cosigner is still liable, but if you decide to surrender the car or house, the cosigner is only on the proverbial hook for the amount not made up by the sale of the item. For example, if you co-sign on your brother’s car loan and he defaults, you are still liable for the remainder of the debt. However, if he agrees to sell the car, you will only be liable for the amount left over after the sale.

The picture is somewhat different for cosigners in Chapter 13 bankruptcy. The stay that is placed on all collection efforts applies equally to both debtors as long as they are individuals and not business entities. The normal repayment plan is organized by the bankruptcy trustee, and in theory, the debt will be discharged at the conclusion of the Chapter 13 case. However, if one debtor dismisses the case, or the loan is not repaid in full, both debtors stay liable for the remaining balance afterward.

Student Loans

Student loans are a particular source of worry for many cosigners, most notably because student loan cosigners are often parents looking to retire soon. The vast majority of banks and other lenders will not even consider lending to young students without a cosigner, however, so there are times when a cosigner can be the literal difference between going to university and not going.

In the past, cosigners have been subject to the full force of creditors’ wrath, even for student loans. However, more and more recent decisions are coming out in favor of cosigner release due to undue hardship. The test applied to cosigners is the same test that is applied to debtors, patterned after the case of Brunner v. New York State Higher Education Services - mostly, a showing that the debtor cannot make payments, though they have made a good faith effort to do so.

Contact A Bankruptcy Attorney Today

California has a rule that if you are intending to cosign on a consumer credit contract, you must receive written notice informing you of the difficulties you may face if your friend or family member defaults. However, there is generally no notice requirement for other cosigning situations. It is important to know what you can do to safeguard your credit score. The Dowe Law Firm can help. Call us today. We serve Contra Costa, Solano and Alameda County.

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