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The Dangers of Cosigning a Loan


Cosigning a loan for a friend or family member is a nice gesture, but doing so is also a serious financial commitment. As such, it is important to carefully consider the potential repercussions before signing on the dotted line. Additionally, one should fully understand what a bankruptcy would mean under these circumstances. To help, our team of West Palm Beach bankruptcy attorneys has outlined what happens when a bankruptcy involves a cosigned loan.

Know What You Are Dealing With

First off, understanding the loan itself is key, mainly because all loans are not eligible for discharge in bankruptcy. For instance, if the loan is secured, the filer will not be able to have it discharged under any circumstances, meaning the risk to the cosigner will be less significant, but only somewhat. The creditor can still come after the cosigner for the amount owed, but in this instance, he or she won’t be the only one with the obligation to repay it. However, cosigned unsecured loans are fair game for discharge.

What Happens After Discharge?

If the individual who took out the cosigned loan was granted a discharge in bankruptcy, things get tricky for the cosigner because t.  When the debtor files for bankruptcy, he or she is required to list all cosigners on bankruptcy schedules, and that person will be notified about the bankruptcy proceedings. However, this will also serve as a reminder to the creditors (as if they need it) that there is another obligor who is also responsible for repaying the amount owed. The lender will be quick to come after this individual for what is owed, and will have the full right to do so.

In the event that the cosigner cannot or chooses not to repay the loan, he or she is almost certainly in for a legal battle. In fact, the creditor may even sue the debtor for nonpayment. This could allow the bank to garnish wages and depending on what the loan was taken out for, repossess assets. Say the loan was for a house, the cosigner will likely face foreclosure. Or if the funds were for a car, that car will probably become the property of the lender. Even if the bank agrees to settle the debt for what has already been paid, the remainder of the balance will have to be reported on tax returns as “debt forgiveness income,” creating a tax liability. Each of these actions will tack on excess legal fees and can further damage one’s credit history, affecting future purchasing ability.

When it comes to cosigning a loan, it is best to ask questions before committing to do so. However, we know that is not always the case. If you have questions about a loan you have cosigned on that may be involved in a bankruptcy, call a West Palm Beach bankruptcy attorney today at Kelley Kaplan & Eller today.

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