If your credit is less than adequate, a co-signer with great credit can be your lifeline. By co-signing, she makes herself equally responsible for the loan. That may be enough to convince a lender to let you take out a mortgage or an auto loan. If your co-signer files for bankruptcy later, however, that will wipe out her obligation to pay if you default on the loan.
The Impact on You
Just because your parent or friend co-signed your loan doesn't make his bankruptcy your bankruptcy. His filing won't show up on your credit report, and it won't affect your responsibility for the loan or change the terms you signed. Legally, you have to keep up payments just as much as when your co-signer was solvent. As long as you do, your lender shouldn't have any reason to complain about the loss of your co-signer.
If You Default
Co-signing has been described as guaranteeing a loan the bank doesn't think is a safe investment. If it turns out the loan really is more than you can handle, the lender isn't obligated to try and squeeze the money out of you. Instead, the company can go after your co-signer if you default, which lets you off the hook. However, if your co-signer files for bankruptcy, that's no longer an option. You're then the only one your creditor will pursue for repayment.
If your spouse co-signed the loan with you, her bankruptcy still doesn't affect the loan. A lot of her assets and income will go to pay off her creditors, so you may find it harder to pay off the loan and your other debts each month. If you do have any jointly owned assets, the bankruptcy court may seize and sell them. The laws vary wildly among states, so the two of you should talk to a bankruptcy lawyer about your situation.
You may not see any chance of your co-signer going bankrupt. The whole point of having a co-signer is that she's someone with excellent credit. However, it doesn't take much to change that -- a long bout of unemployment or a serious illness with big medical bills is often all that's needed. The bank may not be happy your co-signer's finances have gone sour, but it can't change the loan terms just because of that. As long as you stay current, you should be on safe ground.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.