What Will Happen If the Cosigner of Your Loan Files Bankruptcy?


If you require a cosigner to obtain a loan for a home or automobile, it will not only allow you to obtain that item but will help build your credit. Unfortunately, there’s an unforeseen problem that can occur in this type of financial situation. If your cosigner becomes insolvent via a bankruptcy, it could negatively affect you.

Cosigning A Loan With A Mediocre Credit History

Lenders will usually examine the credit history of a person who is acting as a cosigner. If a lender makes a mistake and allows a cosigner with mediocre credit to join you on your loan, there’s always the possibility that your cosigner may end up having financial trouble.

In some situations, the finances of your cosigner may be in order when they help you with your loan, but there is always the possibility of a catastrophic injury or turbulent economy that can change the financial situation of your cosigner from good to bad. If that occurs, it will affect your financial relationship with your cosigner.

Effects If A Cosigner Files For Bankruptcy

If a cosigner on your loan declares bankruptcy, their obligation to pay off your loan is completely removed. This could be a challenge if the cosigner was also helping you make monthly payments. If they are filing bankruptcy, their financial situation is probably not going to allow them to help you make payments anymore.

Your financial strength is going to help determine the effect that the cosigner’s bankruptcy has on your situation. In most cases, if you required a loan to get the home or automobile, you probably don’t have enough to cover the portion of payments that were being fulfilled by the cosigner.

Not Relying On Cosigner For Financial Support

As a rule of thumb, it is not a good idea to use a cosigner on a loan that has monthly payments you can’t cover by yourself. If you don’t rely on the cosigner to help you with payments, you can continue to fulfill the monthly payments of your loan without any problem. In this situation, you would still be building your credit history and have your new purchase.

Unnerving Your Lender

If your cosigner does file bankruptcy, it may unnerve your lender, especially if the loan you took out is relatively new. To help ease the situation and show that you are committed to making payments, you may want to put up more collateral if that is a possibility. Otherwise, you can always send your lender a letter that states you are adamant about keeping your financial commitment.