Bankruptcy comes with various rules and regulations, some of which relate to people other than the bankrupted person.
For instance, if you file for bankruptcy, your partner won’t have it on their financial record if none of the debts are in their name.
For the most part, bankruptcy only affects the person filing it.
However, this leads to some complications regarding a co-signer on any of your loans.
Similarly, if you are a co-signer for someone else, it helps to understand what happens to you if the primary borrower goes bankrupt.
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What is a co-signer?
A co-signer is basically a second person that signs the loan alongside the primary borrower.
Some lenders require a co-signer as added protection against borrowers with a below-par credit history.
It means that the co-signer agrees to take on responsibility for the loan alongside the primary borrower.
In essence, both of you owe the money.
The primary borrower is still responsible for paying back what they borrowed, but the lender can call upon the co-signer if they miss payments or no longer have the ability to pay them.
What happens to the co-signer if the borrower goes bankrupt?
This is where things get very interesting as the co-signer is not off the hook in a bankruptcy.
When the primary borrower goes bankrupt, they’re absolved of their debts.
This means they no longer have to pay the lender, and they can start rebuilding their life.
Unfortunately, the co-signer now takes sole responsibility for the debt.
Therefore, the lender has the right to demand payment from the co-signer.
They will have to pay back what the primary borrower failed to deliver.
As you can see, this is why co-signers are used as added security for a lender.
It prevents a loss of money if a borrower goes bankrupt.
If you have a co-signer on a loan, and you’re about to file for bankruptcy, it’s important to take them into consideration.
Tell them of your financial struggles, and they may help you pay back what you owe.
Don’t file for bankruptcy without thinking about the financial impact it has on a co-signer!
What if I’m the co-signer?
If you’re a co-signer and the primary borrower goes bankrupt, there’s not a lot you can do.
You agreed to sign the loan, so you have to deal with the consequences.
With that in mind, you should think twice before agreeing to be a co-signer.
Ensure you trust the borrower and have assurances that they can handle the loan.
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