If you have bought a car and your loan has a co-signer, you may wonder what will happen to the co-signer when you file bankruptcy. This article explains your options and how they'll affect your co-signer.
Written by Attorney Andrea Wimmer.
Updated September 23, 2020
If you have a co-signer on your car loan, you will have to disclose that following the steps outlined in this article explaining the difference between a co-signer and a co-owner of a car. Since your car loan is a secured debt, you will have to complete Official Form 108, the Statement of Intentions to let the creditor and the court know what you want to do with the vehicle. How the car loan is treated in the bankruptcy will impact both you and your co-signer in different ways.
No matter what you choose, your bankruptcy will not relieve your co-signer from their obligation to pay the debt. The co-signer is viewed as the “backup plan” for the loan. They are basically saying they will be responsible for the debt if you don’t pay it -- even if you don’t pay it due to bankruptcy.
Your options with respect to your car loan are to:
keep the car and sign a Reaffirmation Agreement
If you reaffirm the car loan, you continue to be personally liable for the car loan even after your Chapter 7 bankruptcy is done. If you default, the bank can pursue both you and your co-signer for payment of any remaining balance following the repossession of the vehicle.
keep the car and redeem it
Redemption of a car involves paying the bank the current value of the vehicle in exchange for a clear title. Since your discharge only protects you, your co-signer continues to be responsible for payment of the remaining balance on the loan.
If you surrender the vehicle as part of your Chapter 7 bankruptcy, your co-signer will continue to be responsible for payment of the car loan. If they are also a co-owner of the vehicle (most co-signers or co-borrowers are, but that's not always the case), they can keep the car as long as they continue to make the payments as they come due. This is true whether you're the one in possession of the car when the case was filed or not.
What if I'm the co-signer on someone else's car loan?
If you are the co-signer of a loan and you file bankruptcy, then you are no longer liable for the debt if the initial borrower doesn’t pay the debt. As long as the borrower pays the debt, he or she can keep the vehicle and their credit history will not be affected by your bankruptcy filing. You should list your intent as "surrender" on your Statement of Intentions.
Helpful Hint: Since your bankruptcy filing may cause the bank to temporarily limit online access to the loan account, let your co-signer know to make sure they have a recent statement handy so they can continue making their regular payments as they come due, even if online access is restricted and automatic payments suspended.