Cosigning a loan, lease or another financial obligation for a friend or a loved one is a kind gesture but it involves crucial legal responsibilities. Before you cosign any document, you should take time to understand your obligations to creditors in the event that the borrower is unable to make the payments owed.

If the borrower's situation becomes so dire that they need to declare bankruptcy, as a cosigner you can count on creditors to come after you. How things proceed will depend on the type of bankruptcy case:

• Chapter 13 — Once the borrower files for Chapter 13 bankruptcy, an automatic stay will be issued, preventing debt collectors from pursuing actions against the borrower and any cosigners. However, if the borrower's Chapter 13 repayment plan does not include an intention to fully repay a debt for which you cosigned, you remain responsible for that debt.
• Chapter 7 — The automatic stay given to debtors in Chapter 7 bankruptcy cases does not apply to their cosigners. This means that a creditor can pursue you for debt collection as soon as they want. Unless the borrower repays the debt or reaffirms the debt will be paid in full, it now belongs to the cosigner.

Even if the borrower's debt is discharged during bankruptcy, the cosigner can be held responsible for unpaid bills.

What if your cosigner files for bankruptcy?

Having another trusted person cosign loan application is meant to ensure that required payments are made even if the original signer, who may have bad credit or no credit, is unable to fulfill their obligation. If a cosigner ends up being fiscally unstable and declares bankruptcy, the signer's credit score and financial well-being can also be affected.

The type of bankruptcy your cosigner declares plays a role in determining the repercussions you may face. If your cosigner declared Chapter 13 bankruptcy, you are afforded certain protections from damage that creditors may try to inflict, such as blows to your credit score. If your cosigner declares Chapter 7, you may be less fortunate. In any case, if your cosigner's bankruptcy appears on your credit report, you should be able to successfully challenge it and have it removed.

If you cosigned for someone who declared bankruptcy in New Jersey, or if your cosigner filed for bankruptcy, it is important that you understand your legal rights and responsibilities. At the Law Offices of James C. Zimmermann, we are experienced at handling bankruptcy issues of this sort. Call us at 973-764-1633 or contact us online to schedule your initial consultation. We have offices conveniently located in Hackensack, Vernon, Wayne, Pompton Lakes and Nutley.