Cosigners Bankruptcy

What Happens to a Cosigner in a Canadian Bankruptcy?

Cosigners Bankruptcy – how it works is a frequently asked question of Licensed Insolvency Trustees.

Cosigners Bankruptcy

Cosigners Bankruptcy

A common question from a person contemplating bankruptcy will be: “My father cosigned my $10,000 loan with the bank and I still owe $6,000 on the loan.

How will my father be affected?”

I tell this person that if he files bankruptcy the bank will look to his father to pay the loan.

Cosigner bankruptcy – Joint Debts

Sometimes the question is:  “My wife has a joint credit card with me but all the debt on the card is my debt. Will she be affected?”

Some people, when I explain that the cosigner will be responsible for the debt, ask me what happens if he doesn’t declare the debt in his bankruptcy.

I point out that doing this is a serious offence under the Bankruptcy and Insolvency Act and could lead to him being in bankruptcy for a longer time or having charges laid against him by the RCMP.

So, how does a person explain to his cosigner that he is going into bankruptcy and the co-signer will be responsible for the debt?

I tell this person that the best thing to do is to explain to his co-signer that he must file bankruptcy and unfortunately that will mean the cosigner will be responsible for the debt.

I further advise that he cannot tell the cosigner that he will repay him, as that is forbidden under the Bankruptcy and Insolvency Act. 

I do point out that after he has been discharged from bankruptcy he can voluntarily repay some or all of his former creditors.

In a Consumer Proposal

I had a person come to me for his free initial consultation.

After reviewing his financial information and discussing options with him he decided that a consumer proposal would be the best option for him.

In his proposal he would be offering to pay 50% of his debt to the creditors over 60 months.

Then he said: “What about my uncle, who cosigned the bank loan which now stands at $10,000?”

I suggested that his uncle should payout the bank loan and then take the place of the bank in the consumer proposal.

That way he would be paid approximately 50% of his debt.

I further suggested that his uncle could get independent advice from an insolvency lawyer as to his best course of action.

A week later the debtor came to my office and told me that he would like to proceed with filing the consumer proposal.

He told me that his uncle did consult an insolvency lawyer and was advised to pay off the bank loan and then take the place of the bank in the consumer proposal.

If a borrower is unable to qualify for a loan, they may be able to qualify for credit with a good (ie low) interest rate with the assistance of a co-signer, such as a family member.

The co-signer will be equally responsible for the monthly payments on the personal loan as the primary borrower.

If the borrower defaults on the necessary payments, the co-signer will become responsible for repayment.

Cosigning and co borrowing can lead to financial problems for the co-signer as well.

If you have a good credit history and credit score and wish to help someone apply for the loan they wish to receive you should be aware of the risks.

If you apply for the loan and you are approved for a loan, you will have to sign the loan and you will become responsible as the co-signer.

This loan could appear on your credit report as well, potentially hampering your credit.

Beware with co-signing a loan as it could lead to financial problems and even bankruptcy.