Many times, when someone wants to make a large purchase, like a house or a car, they may need to have someone co-sign the loan with them. Simply put, a co-signer is someone who is making a promise to the creditor to repay a loan if the primary borrower cannot pay and defaults on the loan. We all know that if the primary borrower defaults (or files bankruptcy), the co-signer will be required to pay the loan back in its entirety. But what happens when it’s the co-signer who has filed for bankruptcy? How will that affect the primary borrower?
The best way to describe the situation is with an example. Picture this: Charlie is in the market for a new car, but can only qualify for a loan if he has a co-signer. His friend David agrees to be a co-signer on the land, but he will not be listed on the title as the owner of the car. Sometime later, David files for bankruptcy and is no longer required to pay the car loan. What happens to Charlie?
Charle, as the primary borrower, still has to pay the balance of the loan. Now, when Charlie pays off the loan, there will be no liens on his car, and the car will be titled in his name as the owner. The only difference between being a primary borrower and a co-borrower in an auto finance contract is who the car eventually belongs to after the loan has been paid. Thus, when David, the co-borrower, filed for bankruptcy, that amounts to a breach of the loan agreement and it could be considered default. The creditor, however, now has only one person to look to for the repayment of the loan.