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Can co-signers file for bankruptcy if a loan goes into default?

Taking out a loan, purchasing a vehicle or borrowing money for school usually requires a certain credit score before a borrower can sign on. Banks and other financial institutions often allow people without adequate credit to still secure these types of loans by having a co-signer. Parents and even grandparents in Washington tend to step up to the plate when a family member needs an extra signature in order to get a loan, but this practice has some heading towards bankruptcy.

At least one out of every six adults in the United States has acted as a co-signer for a credit card or a loan, but many of these people are heading into the process without a secure understanding of the possible consequences. When a primary borrower is no longer capable of repaying a loan, creditors turn co-signers, who are also legally responsible for the debt. The initial default by the primary borrower also has a negative impact on the co-signers credit.

So who is taking the hardest hit for defaulting primary borrowers? Even though about 51 percent of co-signers are helping out with auto loans, parents co-signing for their kids' student loans face the highest rate of bankruptcy for defaulted loans. Parents are often under the impression that their children will be able to successfully pay back the debt after graduating from college, but, like students across the rest of the United States, many Washington students struggle with repaying the overwhelming costs associated with a secondary education. By far, parents who thought they were simply helping their children attend school face co-signing related bankruptcy most often.

Being unable to repay a debt is far more than just a financial stressor, and the emotional side of defaulting on a loan can place an enormous strain on an individual and his or her co-signer. Although co-signers sometimes choose to take matters into their own hands by pursuing bankruptcy, there are other available options. When the debt in question is a student loan, some families choose to have the student file for Chapter 13 bankruptcy, which provides protection for co-signers.

Source:, "Co-signing a loan? Consider the risks", Tim Grant, June 27, 2016

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