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How To Protect A Co-Signer In Bankruptcy

Sometimes it is necessary to have a friend or family member co-sign a loan for you when you need extra cash, or need to finance a large purchase like a car. A co-signer is just as financially responsible for repayment of the debt as the original obligor, and the bank will look to that person for payment if the loan becomes delinquent. If you have taken out any loans with the use of a co-signer and now unable to make the payments, your co-signer needs to be made aware of the situation as soon as possible. Rather than have your lenders come after your co-signer for payment, you may be able to work out other arrangements. For instance, perhaps all you need is a bit of breathing room to get back on your feet, and having your co-signer pay the bank while you pay the co-signer is a good idea. This works well if the co-signer is a good friend or a parent, who may be more willing to accept payment from you in order to keep the loan in good standing.

But, if you are not able to make any kind of payment and need to file bankruptcy, your co-signer is exposed to liability for the loan. This is true unless the co-signer also takes the protection offered by bankruptcy, and that most frequently happens in the following situations:

• The co-signer is your spouse.
• The co-signer is also facing financial hardship.

If your co-signer is unwilling to file bankruptcy also, you can take steps within your own bankruptcy case to offer protection to the co-signer. The best protection you can offer is to reaffirm the loan. A reaffirmation agreement is just like a new contract, and you are just as financially obligated to repay the loan after bankruptcy as you were before your case was filed. In this instance, the lender will still ask you for repayment instead of looking to your co-signer for the funds. Of course if you default on the reaffirmation agreement, both parties are still responsible for repayment. But, sticking to a reaffirmation agreement is usually not a problem, because other debts you have are no longer due when you file bankruptcy, which gives you the financial capability of making the payments on the reaffirmed debt.

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