What Happens to Your Car Loan Co-Signer When You File Bankruptcy?

You file bankruptcy. Your debt disappears. Your co-signer? Still on the hook.

That's the harsh reality of secured debt. When you co-signed that car loan together, your co-signer promised the lender they'd cover the debt if you couldn't. Bankruptcy wipes out your legal duty to repay. It does nothing to your co-signer's promise.

This puts people in an impossible spot. You need relief. Your co-signer (often a parent, sibling, or spouse) trusted you. Now they face the lender alone.

What happens next depends on which bankruptcy chapter you file and what you decide to do with the car. Here's how each scenario plays out.

How Chapter 7 Bankruptcy Affects Your Co-Signer

Chapter 7 is the fastest form of bankruptcy. Most unsecured debt vanishes in 90 days. But your car loan isn't unsecured. It's tied to collateral: the vehicle itself.

When you file Chapter 7, you face a choice: keep the car or surrender it. Each path carries different consequences for your co-signer.

If You Surrender the Car

Surrender means you give the car back to the lender. The bankruptcy discharges your obligation to pay anything more.

The lender sells the car, usually at auction. These sales rarely cover the full loan balance. If you owed $18,000 and the car sells for $12,000, there's a $6,000 deficiency.

That $6,000 becomes your co-signer's problem. The lender will contact them for payment. Your co-signer can negotiate, but they're legally liable for the full amount.

This hits credit scores hard. The deficiency shows up as unpaid debt. If your co-signer can't pay, the lender may sue or garnish wages.

If You Keep the Car: Reaffirmation

To keep the car, you need to reaffirm the loan. This means signing a new agreement with the lender that says: "I still owe this debt, even after bankruptcy."

Reaffirmation pulls that debt out of your bankruptcy discharge. You remain personally liable. If you fall behind later, the lender can repossess the car and chase you for the deficiency.

But here's the upside for your co-signer: As long as you make payments, they're safe. The loan stays current. Their credit remains intact. The lender has no reason to contact them.

Courts don't love reaffirmation agreements. Many judges view them as traps that leave debtors vulnerable after bankruptcy. To get court approval, you'll need to prove:

• You're current on payments (or the lender agrees to catch you up)
• You can afford the payment going forward
• The car's value justifies the remaining loan balance

If the judge denies reaffirmation, you can still keep making payments. Many lenders accept this as a "ride-through" arrangement. You pay, they leave you alone, but the debt stays discharged. Your co-signer's status gets murky in this scenario. Some lenders still consider the loan current; others may contact the co-signer.

If You Keep the Car: Redemption

Redemption is another option. You pay the lender a lump sum equal to the car's current market value (not the loan balance). The lender releases the lien. You own the car outright.

Example: You owe $15,000, but the car is worth $9,000. You pay $9,000, and the remaining $6,000 gets discharged in bankruptcy.

Your co-signer walks away clean. Once the lien is released, they're no longer liable for anything.

The catch: You need $9,000 in cash. Most people filing bankruptcy don't have that. Some redemption lenders offer high-interest loans for this purpose, but the terms are brutal. You're trading one debt problem for another.

How Chapter 13 Bankruptcy Affects Your Co-Signer

Chapter 13 offers better protection for co-signers, but it's not automatic.

When you file Chapter 13, you propose a 3-to-5-year repayment plan. The court approves it. You make monthly payments to a trustee, who distributes funds to creditors.

As soon as you file, the co-debtor stay kicks in. This is a special protection unique to Chapter 13. It stops creditors from pursuing your co-signer for consumer debts, as long as you include those debts in your repayment plan.

The stay lasts as long as your case stays active. Your co-signer gets 3 to 5 years of breathing room.

What the Co-Debtor Stay Covers

The co-debtor stay applies only to consumer debts. That includes car loans, credit cards, and medical bills where someone co-signed.

It does not cover business debts or loans taken out for business purposes.

Important: The stay only protects your co-signer if you're making your Chapter 13 plan payments. If you fall behind, the creditor can ask the court to lift the stay. Once lifted, they can contact your co-signer directly.

What Happens If You Miss Plan Payments

Chapter 13 requires strict adherence. Miss a payment, and the trustee may move to dismiss your case.

If your case is dismissed, the co-debtor stay vanishes immediately. The lender can pursue your co-signer for the full amount, plus any interest or fees that accrued during the bankruptcy.

This is why Chapter 13 isn't a guarantee. It offers protection, but only if you hold up your end.

If You Complete Chapter 13 Successfully

If you finish your repayment plan, the court discharges remaining balances on unsecured debts. For secured debts like car loans, you're either paid off or caught up.

Your co-signer's liability ends if the debt is fully satisfied through the plan. If you kept the car and made every payment, the loan is current or paid in full. Your co-signer is released.

Can You Protect Your Co-Signer in Bankruptcy?

You have limited options, but they exist.

1. Keep Making Payments

If you can afford it, keep the loan current before and during bankruptcy. In Chapter 7, reaffirm or ride through. In Chapter 13, include it in your plan. As long as payments flow, your co-signer stays insulated.

2. File Chapter 13 Instead of Chapter 7

If protecting your co-signer is the priority, Chapter 13 is the better choice. The co-debtor stay buys time. Your repayment plan can catch up arrears and keep the lender from contacting your co-signer.

3. Refinance Before You File

If your co-signer has good credit, they might refinance the loan in their name alone before you file bankruptcy. This removes you from the loan entirely. When you file, there's no co-signed debt to worry about.

This only works if your co-signer qualifies on their own and if you act before your credit is completely destroyed.

4. Communicate Early

Tell your co-signer you're filing. Give them as much notice as possible. If you're surrendering the car, they need time to prepare financially or negotiate with the lender.

If you're reaffirming, tell them you're keeping up payments. Silence makes everything worse.

What Your Co-Signer Can Do

Your co-signer isn't helpless. They have options once the lender contacts them.

Negotiate the Deficiency

Lenders often settle deficiency balances for less than the full amount. Your co-signer can offer a lump sum (say, 50% of the balance) to close the debt.

This works best when the lender knows the alternative is a long, expensive collections process.

File Bankruptcy Themselves

If your co-signer can't pay and the lender won't negotiate, they can file their own bankruptcy. This discharges their obligation, just like yours.

It's a drastic step, but it's an option if the debt is overwhelming.

Sue You (Theoretically)

In some states, a co-signer who pays a debt can sue the primary borrower to recover what they paid. But if you just filed bankruptcy, you likely have no assets. This remedy is more theoretical than practical.

Real-World Example: Maria and Her Sister

Maria co-signed a $16,000 car loan for her sister in 2021. By 2023, her sister lost her job and couldn't keep up payments. She filed Chapter 7 and surrendered the car.

The lender sold the car for $9,500. Maria received a letter demanding $6,500 for the deficiency.

Maria called the lender. She offered $3,000 to settle. The lender countered at $4,500. Maria paid it in installments over six months. The debt was marked "settled" on her credit report, which dinged her score but avoided a lawsuit.

Maria's sister's bankruptcy discharged her obligation. Maria absorbed the cost. They don't talk much anymore.

What the Lender Can and Can't Do

Lenders have rights, but they're not unlimited.

The lender CAN:

• Contact your co-signer immediately after you file bankruptcy
• Demand payment for the full loan balance (or deficiency)
• Report missed payments to credit bureaus
• Sue your co-signer if they don't pay
• Garnish your co-signer's wages (after getting a judgment)

The lender CANNOT:

• Contact your co-signer if a Chapter 13 co-debtor stay is in place
• Harass or threaten your co-signer under the Fair Debt Collection Practices Act
• Pursue you for the debt if it was discharged

If a lender violates the co-debtor stay or engages in abusive collection practices, your co-signer can report them to the Consumer Financial Protection Bureau or consult an attorney.

Frequently Asked Questions

Does my co-signer get notified when I file bankruptcy?

Not automatically. The bankruptcy court doesn't notify co-signers. The lender will contact them once your case is filed and they see your debt may not be repaid. You should tell your co-signer yourself before you file. It's the ethical move and gives them time to prepare.

Can I add my co-signer to my bankruptcy case?

No. Each person must file their own bankruptcy case. You can't discharge someone else's debt by including them in your filing. If your co-signer wants relief, they need to file separately.

What if I didn't tell my co-signer I was filing?

They'll find out when the lender contacts them. This damages trust and leaves them blindsided. If you're already in this position, reach out now. Apologize. Explain your options. Offer to help them negotiate with the lender if you can.

Will my co-signer's credit score drop?

It depends. If you keep making payments (through reaffirmation or Chapter 13), their credit stays fine. If you surrender the car or default, missed payments and deficiencies will appear on their credit report. Their score will drop, sometimes by 100+ points.

Ready to File? Understand the Impact First

Bankruptcy solves your problem. It creates one for your co-signer. That's not a reason to avoid filing. If you're drowning in debt, you need relief. But you owe it to your co-signer to understand what's coming and communicate clearly.

If you're considering bankruptcy and have co-signed debts, start by assessing your options. Our free bankruptcy screener takes 2 minutes and shows you whether Chapter 7 or Chapter 13 makes sense for your situation. If you qualify for Chapter 7, our step-by-step filing tool walks you through every form, including how to list co-signed debts correctly.

Your co-signer took a risk for you. You can't undo that. But you can file your case with clarity and give them the information they need to protect themselves.