What Happens if You File Bankruptcy & Are Cosigned for an Auto Loan?
If someone co-signed an auto loan with you, it means that your bankruptcy could leave that person 100 percent responsible for the debt. This is true in spite of the fact that your co-signer likely didn't get the benefit of driving the car. Whether your bankruptcy will leave your co-signer on the hook for the debt will hinge on the type of bankruptcy you file and whether you reaffirm the debt.
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Chapter 7
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Unless you reaffirm the automobile loan and keep the car, your filing a Chapter 7 will leave your co-signer to handle the loan balance himself. Chapter 7 bankruptcy discharges all but a few categories of debt. Chapter 7 won't discharge priority debts, such as certain tax liabilities. Chapter 7 also won't discharge the secured portion of a debt, meaning the lender with the security interest in your car can sell it to recover whatever it can on the loan. The loan balance left after the sale, if any, is discharged as to you, but not to the co-signer, who will have to pay it off.
Reaffirmation
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If you want to file a Chapter 7 but don't want to give up your car or leave your co-signer on the hook, you can reaffirm the debt. Reaffirmation involves telling the bankruptcy court you waive the right to discharge the co-signed auto loan in your bankruptcy. You generally must file your signed reaffirmation agreement with the bankruptcy court before your discharge or before the lapse of the 60 days following the 341 meeting. A 341 meeting is a hearing where the bankruptcy trustee and your creditors question you about your petition while you're under oath.
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Chapter 13
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Filing a Chapter 13 is another way to protect your co-signer from bearing the auto loan obligation alone. You must have steady income to qualify for a Chapter 13. You also can't have more than $360,475 in unsecured debt or $1,081,400 in secured debt. Chapter 13 will require you to faithfully pay your debts through a three-year to five-year payment plan. It will also allow you to stay on the vehicle loan with your co-signer.
Credit Report
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Your bankruptcy filing will stick with you for a long time. If you choose a Chapter 7, your future creditors and employers will see it on your credit report for the next 10 years. If you file a Chapter 13, they will see it on your credit report for the next seven years. In either case, if you walk away from the co-signed auto loan, future obligations associated with the loan should not appear on your credit report.
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References
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