When Your Co-Signer Files for Bankruptcy

Did a parent or family member co-sign on your private student loans or for another substantial purchase on credit? You are likely to have many questions if you find out that your co-signer has decided to file for personal bankruptcy. Should Chicago residents in this situation worry about the status of their loans and their relationship with the creditor? A recent article in the St. Louis Post-Dispatch helped to explain what happens when a consumer takes out a loan with the help of another’s credit profile, and that co-signer files for Chapter 7 bankruptcy.
We will take a closer look at the situation described in the article to help explain what you should do if you learn that your co-signer is seeking bankruptcy protection.
Help! My Co-Signer is Filing for Bankruptcy
By taking a closer look at the scenario presented in the article, we can explain how a consumer should handle a situation in which her co-signer files for bankruptcy. According to the article, a concerned consumer (we will call her Jane for the sake of the hypothetical) explained that her father co-signed her private student loans and later filed for personal bankruptcy without telling his daughter. When she logged into her account to make a payment on her student loans, she learned that she was categorized as being in default due to bankruptcy.
When Jane tried to contact the lender, a representative indicated that the lender could not provide additional information until the bankruptcy was “settled.” In addition to being unable to make student loan payments, she also learned that her credit score had “plummeted.” Should Jane contact a bankruptcy lawyer to decide how to proceed with her loans and her credit profile?
The situation described above is a common one when a co-signer files for bankruptcy. In short, when someone files for bankruptcy, the creditor “will often call an entire loan due . . . in an attempt to collect on the account before or during the process” of bankruptcy. When a creditor takes this kind of action, the entire account can be frozen, and when an account is frozen, the borrower or borrowers cannot make payments. Such action by the creditor can also result in a “default” indication on the borrower’s credit report. Yet it is not only the debtor who filed for bankruptcy who is impacted. Even a solvent borrower who has been making regular payments on a student loan, for example, can be negatively affected by a co-signer’s decision to file for consumer bankruptcy.
The Type of Bankruptcy Matters
There is good news if a co-signer files for Chapter 13 bankruptcy. Debtors create repayment plans under a Chapter 13 bankruptcy, and protection under this bankruptcy chapter specifically provides for protection of a co-debtor and provides against creditors damaging a co-debtor. In other words, if your co-signer filed for Chapter 13 bankruptcy and your account was frozen or your credit score took a hit, you may have legal recourse. Under Chapter 7, however, you may not be protected if a co-signer files for bankruptcy. Your best course of action is to contact an experienced Chicago bankruptcy lawyer to learn more about your options.
In the event that a co-signer does file for bankruptcy, in addition to checking on the co-signed loan and your ability to repay it, it is important to keep a close eye on your credit report. But no matter what, you should remember that it is important to have an experienced consumer protection advocate on your side. Do not hesitate to discuss your situation with a dedicated Chicago bankruptcy attorney. Contact the Emerson Law Firm today.
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