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How a cosigner can be affected by a loved one's bankruptcy

When someone asks their parent, grandparent or other loved one to cosign a loan for them, they oftentimes agree. Why? Because family members usually want to help each other out in time of financial need. They don't want to see their child, grandchild, niece or nephew do without a car or student loan for college. But if the person who took out the loan is unable to repay the debt and files for bankruptcy, the cosigner may be on the hook and could even face damage to his or her own credit score. So some individuals may be considering the best way for them to handle this situation.

First of all, cosigning on a loan could be asking for trouble. Those who typically need help with a loan have a low-paying job (or none at all) or mountains of debt. It can be difficult to trust this person to repay the loan. This means that the cosigner may wind up liable for it. If the individual taking out the loan has the money to repay the debt, then it may be a safe bet. But if not, then it may be in an individual's interest to just say 'no.'

However, those who have a loan or who have cosigned on a loan and are now on the hook for it may find it too overwhelming. In these instances, it might be wise to get professional help and to consider bankruptcy. There are many types of bankruptcy that may help an individual find debt relief. A Chapter 7 bankruptcy, for example, stops creditor harassment and may eliminate debt. However, those filing for bankruptcy and have cosigners on some of their loans should know that Chapter 7 does not protect those cosigners from debt collectors. Therefore, a cosigner would have to pay off the debt in a timely fashion or find his or her own debt relief options.

A Chapter 13 bankruptcy, on the other hand, focuses on a repayment plan. While a cosigner will be affected, there are more provisions in place to financially protect him or her from debt collectors.

In any case, bankruptcy is a real option for those facing insurmountable financial challenges. There may be difficulties to contend with, but an attorney may be able to help a debtor understand the challenges and risks involved with filing for bankruptcy.

Source: Los Angeles Times, "Filing bankruptcy? How to protect loved ones who cosign loans," David Lazarus, Aug. 1, 2014

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