What Happens to a Cosigner in Bankruptcy?

Co-signing loans and bankruptcy

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Co-signing Loans and Bankruptcy – how it works is a frequently asked question of Licensed Insolvency Trustees.

Co-signing Loans and Bankruptcy

I explain that the fine print concerning having joint credit cards is that each person is responsible for paying the debt in full if the other person defaults.

A common question from a person contemplating bankruptcy will be: “My father co-signed 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.

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 co-signer 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 co-signer 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 co-signer will be responsible for the debt.

I further advise that he cannot tell the co-signer 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.

Co-signers 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 co-signed 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.