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 October 5, 2021
How a Chapter 7 filing affects your cosigner depends on what you decide to do with your car and car loan. The cosigner is viewed as the “backup plan” for repayment of the loan. The person who cosigned the auto loan is responsible for the debt if you don’t pay it – even if you don’t pay it due to bankruptcy. How the car loan is treated in the bankruptcy will affect both you and your cosigner in different ways.
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. You also have to list your cosigner on your forms following the steps outlined in this article.
No matter what you choose, your bankruptcy will not relieve your cosigner from their obligation to pay the debt.
What Are the Options for My Car Loan? How Does Each Affect My Cosigner?
You generally have three options when it comes to auto loans:
OPTION 1: 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 on your monthly payments, the lender can pursue both you and your cosigner for payment of any remaining balance following the repossession of the vehicle.
If you choose this option, you’ll likely be current with your monthly payments throughout your bankruptcy case. As a result, your bankruptcy filing won’t affect your cosigner or their credit score.
OPTION 2: Keep the Car and Redeem it With a New Loan
Redemption of a car involves paying the bank the current value of the vehicle in exchange for a clear title. Since your bankruptcy discharge only protects you, your cosigner continues to be responsible for payment of the remaining balance on the loan. As soon as you stop making payments on loan, the cosigner’s credit will be negatively affected.
OPTION 3: Surrender the Car and Discharge Your Obligation To Pay the Debt
If you surrender the vehicle as part of your Chapter 7 bankruptcy, your responsibility to pay the loan is discharged. Your cosigner will continue to be responsible for payment of the car loan. If they are also a co-owner of the vehicle (most cosigners 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 Cosigner on Someone Else's Car Loan?
If you are the cosigner of a loan and you file bankruptcy, then you are no longer liable for the debt if the person you cosigned for stops paying. As long as they pay the debt, they can keep the vehicle and their credit history will not be affected by your bankruptcy filing. Most people in this situation list their intent as "surrender" on their Statement of Intentions.
Since your bankruptcy filing may cause the bank to temporarily limit online access to the loan account, let your cosigner know before you file. That way they can make sure they have a recent statement handy so they can continue making their regular payments even if online access is restricted and automatic payments suspended.
If you’re current on your car loan and continue to pay on time, your cosigner won’t be affected by your bankruptcy filing. But, if you surrender or redeem the vehicle, your bankruptcy discharge won’t shield your cosigner from having to pay the balance of the loan.