Can We Co-Sign on Our Daughter's Car if We Filed for Bankruptcy?

Parents often co-sign for a child's new car. The purchase, perhaps coming after college, is usually the largest purchase ever for the adult child. However, lenders may object to approving the loan without a co-signer. That's where the parents step in, as they sign paperwork promising to pay the loan if the child defaults. That's a big responsibility, and requires the co-signing parents to have excellent credit. Parents who have filed for bankruptcy are highly unlikely to qualify as co-signers -- with limited exceptions -- until well after their bankruptcy and complete rehabilitation of their credit.

Considerations

Bankruptcy is the most negative credit event possible, and remains on credit reports for 10 years. People emerging from bankruptcy usually need two or three years before they begin qualifying for credit at reasonable interest rates. Credit cards with small limits are usually available immediately after the bankruptcy. Big-ticket items such as a car or even a mortgage are possible as well -- but usually only as the primary borrower and at exorbitant interest rates.

Qualifications

Co-signers usually fit a certain profile. They have excellent credit scores and few blemishes on their credit report. Credit scores range from 350 to 850, with scores of 720 or higher considered excellent. It is possible for someone emerging from bankruptcy to quickly rebuild a credit score over a couple of years by opening new accounts and making on-time payments while keeping balances low. However, a bankruptcy notation on a credit report will serve as a red flag for formerly bankrupt parents looking to co-sign for a child.

Concerns

The lender's biggest concern is that the parents, because of their bankruptcy past, might refuse to make the loan payments if the child defaults -- or may even file for bankruptcy again to avoid the debt. Such considerations are all a part of the stigma attached to bankruptcy.

Exceptions

There are some possible exceptions. Parents who have turned their lives around financially may qualify for co-signers if they also offer other collateral. For example, the parents may have opened a new business and saved some money since the bankruptcy. In that case, they may qualify as co-signers by allowing the bank to freeze money they have on deposit at the bank and use it as collateral for the car loan. Such an arrangement allows the child to receive the loan and buy the car, and gives the parents the pleasure of co-signing. It also relieves any fears the bank has about the parents accepting responsibility for the loan if the daughter defaults.