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How loan cosigners could be affected by your bankruptcy

There are many things to consider when deciding if bankruptcy is right for you. Are there alternative options? How will it affect your credit and future financial goals? How will it affect your family? The list goes on.

Each situation is different, so it is best to speak with an experienced bankruptcy attorney about your case in order to make the most informed decision. In today’s post, however, we’ll talk about an issue that is common among individuals considering personal bankruptcy: Outstanding loans that were cosigned by family members.

The majority of individuals filing personal bankruptcy either file Chapter 7 or Chapter 13. If you have a loan cosigned by a family member, Chapter 13 bankruptcy will be less likely to negatively impact your cosigner.

When you file Chapter 7, most of your debts can be discharged. This means that creditors can no longer pursue payments from you. However, they can (and likely will) pursue payments from the person who cosigned the loan. This means that the cosigner could be stuck with the remainder of the outstanding debt and their credit score could be damaged if they do not take over regular payments.

Conversely, Chapter 13 focuses on restructuring debts and creating manageable repayment plans. Because you are not trying to discharge the cosigned loan, it is less likely that creditors will pursue payments from the cosigner.

These are general rules, but as always, exceptions exist. Please consult with an experienced bankruptcy attorney before deciding on any particular course of action.

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

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