If you ask any parent of a college student, you will hear that cosigning for a loan is never a good idea. On the other hand, especially with young people, it is often the only choice. Although there are many responsible young adults out there, it does not mean there is no risk of them falling into a deep hole of financial misfortune.
Cosigning and Bankruptcy
Cosigning for a loan has long been known as a double-edged sword: although the act can exponentially aid the signer in obtaining a loan, the cosigner usually does his or her duty with little to no reward. When done correctly, the action instigates a neutral result; the loan is paid and the cosigner, with no debt on his or her shoulders, goes on with his or her life. When the singer is forced into bankruptcy, however, cosigning spells trouble for all parties involved.
Below you will find what measures to take, if you have cosigned for an individual who is now at the hands of his or her bank.
What to do if you’re a Cosigner for Someone Who has defaulted on their Loans
Approach with Care
When you have cosigned for a loan on which the signor has defaulted, it is important to address the situation as logically and as mindfully as possible. Avoid making decisions that could later backfire, like stalling the situation or taking out another loan to pay your current debts. The former option could lead to home foreclosure and repossession of your car, while the latter could land you in a heap of exorbitant interest rates.
Get an Attorney
One of the first things you should do is speak with a lawyer whose specialty is in the field of cosigning, interest rates, and bankruptcy. While many law experts charge high fees for consultations and services, the few hundred dollars you pay may save you thousands in the future. If you are truly in a pinch, there are several lawyers who will offer a free consultation to those who are truly in need.
If you find the owner of the loan for which you have cosigned is at risk of default or is already inundated in debt, you should waste no time in getting the problem solved. The sooner you speak to someone, the less impact the error is likely to have on your bank account.
As we stated above, bankruptcy is the last scenario in which one would want to do anything rash. When finding you have cosigned for a defaulted loan, you must first figure out which type of bankruptcy the debtor plans to file. Next, you should turn your focus to the timeline of the signer’s decisions, so you can plan your steps accordingly.
There are three types of bankruptcy that can be filed, each with a different outcome:
- Chapter 7
A Chapter 7 filing involves liquidation, or the selling of the debtor’s belongings in order to pay the debts. If you find the loan of which you are the cosigner has been filed under a Chapter 7, see what you can do to reduce your chances of having your property taken as collateral.
- Chapter 11
A Chapter 11 bankruptcy is one that takes into consideration the debtor’s affairs and assets in the form of business. As such, it is typically filed by businesses. It offers the debtor a fresh start, with a plan of repayment and reorganization. Should the owner of the loan on which you cosigned have filed for Chapter 11, be wary of its falling into the territory of Chapter 7.
- Chapter 13
Chapter 13 bankruptcy involves the debtor’s repayment of his or her debts within a time frame that is set by the courts. During that time, any percentage of the debtor’s income may be used to pay back the necessary funds in-full. Should you have cosigned for a loan that is being filed under Chapter 13, make sure you do as much as is in your power to have little to no of the owing coming out of your income.
Stay in the Present
In order for you and your lawyer to come up with the best decision for moving forward, it is important you remain updated on the situation and keep in contact with the debtor. The facets of the situation that are the most critical to keep in mind are:
- The remaining balance – How much still needs to be paid?
- Remaining loan payments – How many payments have been missed, and to what do they amount?
- Cosigner responsibilities – What do you need to do, as the cosigner of the loan?
While it may seem uncomfortable, it is wise to sit down with the debtor and evaluate the factors that led him or her to this point, as well as the measures that would be the best to take to get out of the mess. In the long run, the discussion could lead to a mended relationship and a more quickly-solved problem.