Nicolet Law Office, S.C.

A co-signer's bankruptcy can impact your credit score

Often, those who co-sign for loans with other people — a parent who co-signs on a child's student loans, for instance— are told repeatedly about the risks. In that example, if the child does not pay the loan back, the parent still has to pay.

However, it's interesting to note that there are certain risks to the initial co-signer, as well, especially if the other party decides to file for bankruptcy.

For instance, a young woman got her father to co-sign with her on her student loans. She then started paying them back, as she was supposed to, but her father decided to file for bankruptcy. He did not tell her he was doing so.

Suddenly, her credit score started falling, there was a freeze on her account, and she couldn't pay each month. Her loan was sent to another company, which was trying to collect the loan in full.

What becomes important in cases like this is which type of bankruptcy was filed. If Chapter 13 is used, the above should not happen. Chapter 13 is designed not to harm co-signers, and it is also a type of bankruptcy based on a payment plan.

Chapter 7, though, could have this impact on co-signers, as it is a liquidation-style of bankruptcy, so lenders often scramble to collect as much as they can, all at once. Co-signers can then see their scores drop when loans that they are responsible for are marked as being in bankruptcy — even if they did not file for it themselves.

Bankruptcy can be quite useful in Wisconsin, but be sure you know all of the ramifications of filing, especially if you're a co-signer on a loan.

Source: Credit.com, "My Co-Signer Filed for Bankruptcy. Will I Be Affected?," Jeanine Skowronski, Nov. 02, 2015

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