December 10, 2013 /24-7PressRelease/ -- The co-signor and bankruptcy---
Article provided by Law Offices of Brian A. Barboza
Visit us at http://www.barbozalaw.com
It seems you need credit for everything these days. Despite the old adage that if you co-sign a loan, consider it to be a gift, many well-intentioned parents, grandparents, brothers, and sisters are co-signing loans. There are, of course some good reasons why people decide to become a co-signer--helping a loved one buy a car or first home, or to establish a credit history. But while you may be aiming to do well, co-signing can have huge financial consequences. Anyone who files a petition in bankruptcy must file a Schedule H, which lists co-debtors, or co-borrowers, or co-signers. One day you may open up your mail and find a notice from the bankruptcy court that the person you have co-signed for has filed for bankruptcy. Gulp.
When a person is granted a discharge in bankruptcy, his or her liability on those debts goes away--the debt, however, does not. If there is another person liable for the debt, that person is still responsible. If the debt is unsecured, the creditor is free to pursue the cosigner for the entire amount of the debt and the individual who is granted the discharge in bankruptcy walks away with no responsibility. A co-signor is somewhat better off if the debt was secured by some collateral, such as a car or house. In a Chapter 7 bankruptcy, the creditor can take the collateral if the loan is in default, but the co-signor is still responsible for the underlying debt. If the collateral was a car, for instance, and the amount owed was $20,000 but the car only brings $12,000 at auction, the co-signor is on the hook for the $8,000 difference and again the individual who is granted the discharge in bankruptcy walks away with no responsibility.
Because many individuals co-sign for student loans, it is important to point out that private student loans are given special treatment under the bankruptcy law. Congress requires private student loan borrowers to initiate an adversary proceeding, a separate lawsuit filed within the bankruptcy case, in which they have to prove that repaying their student loan debt would be an "undue hardship" before the debt can be discharged. In the Ninth Circuit, which includes California: (1) a debtor must show that, if the debtor is forced to repay his or her student loans at their current level of income and expenses, they will be unable to maintain even a minimal standard of living for themselves and their dependents, consisting of little more than food, shelter and medical insurance; (2) the debtor must show that these circumstances are permanent, or at least likely to persist for a "significant portion" of the remaining repayment period; and (3) the debtor must show that he or she has made good-faith efforts to repay the loans. This is a difficult test to meet and may prevent the debtor from walking away from the obligation although the co-signor's obligation is not diminished either.
The Bankruptcy Code is not easy to navigate and anyone who has co-signed an obligation and has received the notice that the obligor has filed for bankruptcy should seek the immediate council of an experienced California bankruptcy attorney.
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