If you cannot qualify for a loan on your own, a loved one can use his income or credit history to "vouch" for you to the lender. The lender then bases its lending decision at least partially on the cosigner's qualifications. Should you default on repayment, the lender may then legally pursue your cosigner. The financial consequences are markedly less for the primary borrower should her cosigner file for bankruptcy than they would be for the cosigner if the borrower filed for bankruptcy.
Cosigner Bankruptcy
If you were to file bankruptcy, your cosigner could be held liable for paying off the remainder that you owe to the lender. Your cosigner's bankruptcy petition, however, does not directly affect you provided you continue making payments to the lender. Because you are already responsible for paying the debt, the lender does not need to take additional collection action against you as the result of your cosigner's bankruptcy.
Effects
Once the court discharges your cosigner's bankruptcy petition, your lender loses the right to demand payment from your cosigner should you stop making payments. The lender's only recourse if you default is to repossess any collateral you used to qualify for the loan or sue you and attempt to collect the debt through garnishment or liens.
Credit Impact
When your cosigner files for bankruptcy, the credit bureaus include a record of the bankruptcy on his credit report. Your lender reports the loan's status on both your credit report and your cosigner's. When your cosigner lists the lender as a creditor in her bankruptcy case, your credit report may reflect the fact that the loan was included in a bankruptcy proceeding. Provided you do not file bankruptcy yourself, this notation does not affect your credit rating.
Warning
Bankruptcy severely injures the petitioner's credit rating. While a consumer can repair her damaged credit over time, the Fair Credit Reporting Act permits the credit bureaus to leave a bankruptcy on the petitioner's credit files for up to 10 years. The bankruptcy will drop your cosigner's credit score. A low credit score coupled with a bankruptcy notation may render the individual unable to help you if you need a cosigner again in the near future.
Considerations
A typical debtor/cosigner relationship exists when the cosigner's sole role is helping the borrower qualify for a loan. The borrower makes payments to the lender with the cosigner only taking on payments should the borrower be unable or unwilling to do so. If your cosigning relationship is one in which you and your cosigner share a joint debt and each contribute equal payments on the account, your cosigner's bankruptcy will affect you the same way a borrower's bankruptcy would affect a traditional cosigner.
If your cosigner files Chapter 7 bankruptcy, you are responsible for repaying the debt in full. If your cosigner files Chapter 13 bankruptcy, she can continue paying your shared creditor via a repayment plan provided the bankruptcy trustee approved the plan.
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