What Happens to the Co-Signer of a Car Loan in Bankruptcy?
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When you file for bankruptcy, your co-signer stays legally responsible for the co-signed debt, even if your obligation to repay it is discharged. In Chapter 7 bankruptcy, the lender can still pursue your co-signer if the car is surrendered or the borrower defaults on the loan. Options like reaffirmation or redemption may reduce your co-signer’s risk if payments continue. In Chapter 13 bankruptcy, the co-debtor stay may temporarily stop the lender from going after your co-signer, but this protection is lost if payments aren’t made.
Written by Mae Koppes. Legally reviewed by Jonathan Petts
Updated January 30, 2025
What Happens to a Car Loan Co-signer in Bankruptcy?
If you file for bankruptcy, your co-signer can still be held responsible for the car loan. When someone co-signs a loan, they agree to take on the responsibility for the debt if the primary borrower — meaning you — can’t pay.
Bankruptcy can erase your responsibility to repay the loan, but it does not erase the co-signer’s liability. In other words, they’ll still be on the hook to repay the loan.
What happens next depends on the type of bankruptcy you file and whether the car loan is current or in default.
In Chapter 7 bankruptcy, if the car loan is discharged, the lender can still pursue the co-signer for repayment.
In Chapter 13 bankruptcy, there’s a chance your co-signer will be protected under the automatic stay if the debt is included in your repayment plan, but this isn’t guaranteed.
How Does Chapter 7 Bankruptcy Affect My Co-signer?
Filing Chapter 7 can affect your co-signer’s financial responsibility for your car loan. The impact it has depends on whether you decide to keep the car or give it up as part of the bankruptcy.
If you decide to keep the car, you’ll need to either reaffirm the loan or redeem the vehicle. Each has different impacts on your co-signer, which we discuss in the next sections.
If you surrender the car, the lender can still hold your co-signer responsible for any remaining debt after the car is sold.
The bottom line: Chapter 7 can relieve your obligation to pay the car loan, but it doesn’t erase your co-signer’s responsibility. This means your decisions during bankruptcy can leave your co-signer at risk of having to make payments, even if you’re no longer legally required to do so.
Now, let’s take a closer look at each option and how it affects your co-signer.
Option 1: Keep the Car and Sign a Reaffirmation Agreement
If you want to keep your car after filing Chapter 7 bankruptcy, one option is to sign a reaffirmation agreement with your lender. This is a contract where you agree to keep paying the car loan, even after your bankruptcy.
When you reaffirm the loan, it won’t be discharged like your other unsecured debts (such as credit card debt). You’ll continue making payments as if the bankruptcy never happened.
That said, it’s important to stay current on these payments because, if you fall behind, the lender can repossess the car. Then they come after you and your co-signer for any remaining loan balance (also called a deficiency balance) after the car is sold. This usually hurts your and your co-signer’s credit score.
On the bright side, reaffirming the loan and making on-time payments protects your co-signer. Their credit won’t take a hit, and they won’t be held responsible for the loan as long as payments are made.
But before reaffirming, it’s important to think carefully about whether you can afford the payments in the long term. Missing payments in the future could harm both you and your co-signer.
If you want to reaffirm the loan, you’ll usually need to be current on your car payments. If you’re behind, the lender may not agree to the reaffirmation, and the court may not approve it either.
Option 2: Keep the Car and Redeem It With a New Loan
If you choose to redeem your car in Chapter 7 bankruptcy, you’ll need to pay the lender the current market value of the vehicle in a single lump sum. In exchange, you’ll receive a clear title to the car, and the rest of the loan balance will be wiped out as part of your bankruptcy.
If someone co-signed your car loan, redemption can actually help them. Because the loan is satisfied when you redeem the car, your co-signer won’t be stuck with the remaining loan balance, and this won’t impact their credit history negatively. This option removes your co-signer’s risk as long as the redemption is completed.
Option 3: Surrender the Car and Discharge Your Obligation To Pay the Debt
If you decide to surrender the car in your Chapter 7 bankruptcy, you’ll no longer be responsible for paying the car loan. However, if you have a co-signer on the loan, they’ll still be responsible for making the payments.
If your co-signer is also listed as a co-owner of the car (which is often the case, but not always), they may be able to keep the car as long as they continue making the payments. This is true no matter who had possession of the car when you filed your case.
What Happens to a Co–signer in Chapter 13 Bankruptcy?
In Chapter 13 bankruptcy, your co-signer might get some temporary protection from collection efforts.
If you include the car loan in your repayment plan and stay current on your payments, the automatic stay (a legal pause on collections) could stop the lender from going after your co-signer while your case is active. But this protection isn’t guaranteed. If you miss payments on the loan or your repayment plan, the lender can still pursue your co-signer for the remaining balance.
One of the benefits of Chapter 13 is that it allows you to restructure your loan, which could make it easier to keep up with payments. For example, you might be able to lower your monthly payment or even reduce the total amount you owe through something called a “cramdown.”
But keep in mind that these changes only apply to you. Your co-signer will still be legally responsible for the original loan terms. If the loan isn’t paid as agreed, the lender can still hold your co-signer responsible for the debt.
What if I'm the Co-Signer on Someone Else's Car Loan and I File Bankruptcy?
If you’re the co-signer on a car loan and you file for bankruptcy, your responsibility for the debt will be discharged. This means that if the primary borrower stops making payments, the lender can’t come after you for the remaining balance.
As long as the primary borrower keeps making their payments on time, they can keep the car, and their credit won’t be affected by your bankruptcy filing. Most people in this situation indicate "surrender" for the car loan on their bankruptcy paperwork, even though the car won’t actually be surrendered if the primary borrower continues to pay.
Should I Let the Person I Co-Signed For Know I’m Filing Bankruptcy?
Before you file your bankruptcy case, it’s a good idea to let the primary borrower know.
Sometimes, your bankruptcy filing can temporarily limit online access to the loan account or pause automatic payments. By giving the primary borrower a heads-up, they can make sure they have the loan details handy and are ready to make payments manually if needed.
Let’s Summarize…
If you’re current on your car loan and continue to pay on time, your co-signer won’t be affected by your bankruptcy filing. But, if you surrender or redeem the vehicle, your bankruptcy discharge won’t shield your co-signer from having to pay the balance of the loan.
Understanding how car loans are treated under bankruptcy law can be complicated. If you want legal advice specific to your situation, Upsolve can connect you with a bankruptcy attorney for a free consultation. You can also learn about your other debt relief options by taking our quick screener.
