What Happens to Co-Signers Under Chapter 7 Bankruptcy?

If you’ve co-signed on a loan and the borrower files for Chapter 7 bankruptcy, you will be held responsible for the debt. Creditors can, and often do, come after co-signers for repayment, potentially harming your credit or having to deal with a collection agency.

Before agreeing to co-sign, it’s important to understand the risks. If you’ve already agreed to be a co-signer, there are still steps you can take to protect yourself.

Potential Consequences for Co-Signers

Jen Lee is a former bankruptcy attorney who now educates and advises other lawyers on bankruptcy issues. She explains that under Chapter 7, the borrower who filed for bankruptcy will no longer be liable for the debt. Still, the co-signer will be, regardless of whether they have primary or secondary liability. 

“Creditors can and will pursue the cosigner if payments are not made,” she says. However, she notes, “if payments continue to be made on the debt, then it will not affect the co-signer’s credit.”

How to Protect Yourself as a Co-Signer

According to Lee, “The best way for cosigners to protect themselves is to not cosign. If someone needs a cosigner, a lender has already determined they are not a good risk.”

But if you’ve already agreed to co-sign or are seriously considering it, Sasha Bojat, founder and lead attorney at Bojat Law Group, says it’s critical to be proactive:

• Review the loan terms carefully. Understand what you’re agreeing to and when you’d become liable.
• Talk to a lawyer early. Get legal advice before the borrower files for bankruptcy.
• Negotiate with the lender. Try to modify or restructure the loan before the bankruptcy filing.
• Keep an eye on your credit. If payments lapse, collections may contact you, and your credit score may drop.
• Explore indemnification agreements. These legal agreements may offer some recourse, especially if you felt pressured into co-signing.

Bankruptcy attorney Gerald Bauer also recommends contacting the creditor directly and continuing to make payments or attempting to work out a repayment plan. Otherwise, he says, the co-signer will have “limited protection against the collection activities of the judgment creditor.”

The Bottom Line

Co-signing a loan may feel like a favor, but it comes with real financial risk, especially if the borrower ends up filing for Chapter 7 bankruptcy. If that happens, you’ll still be legally responsible for the debt and could face collections or credit score damage.

If you’re already in this situation, consult a bankruptcy lawyer or financial advisor to understand your options and protect your financial future.