How will bankruptcy affect a co-signer?

You might be wondering how will bankruptcy affect a co-signer. As a co-signer, you will likely encounter negative consequences when the person you share a note with files bankruptcy. Ultimately, you will still be liable for the debt and you may receive a negative mark on your credit report.

Liability for the Debt

When you co-sign a loan, you are guarantying payment of the debt. Many people do not realize the importance of such an act when they agree to do it. Co-signing a loan makes you just as liable for making the payments as the other party. If that person files bankruptcy, the responsibility then falls on your doorstep. However, there are certain circumstances that will provide a better outcome for you if a bankruptcy is filed. 

If the person files a Chapter 13 and pays the debt through the bankruptcy payment plan or directly, you may not have to pay anything. This is also the case if the debt is secured and reaffirmed in a Chapter 7. However, if only a portion of the debt is paid or none at all, the creditor will likely look to you for payment.

Credit Report

The loan you co-sign for will usually show up on your credit report. As such, the payment history also shows up, which means if the person you co-signed a note for stops making payment, your credit report will reflect it and your credit score will go down. This is also the case when a bankruptcy is filed. Even though you did not file, the account on your credit report may have a notation that it is included in a bankruptcy.