What Happens to Your Auto Loan if the Cosigner Declares Bankruptcy?

Using a loan cosigner on an auto loan may be required or may be optional. If the cosigner on your loan declares bankruptcy, the process for handling the situation will be different, depending on the circumstances of the loan. If a cosigner was required by your lender, you may have a harder time keeping the loan alive without penalty. In both cases, a modification on the loan contract will be required.

Required Cosigner

A cosigner may be required to overcome a number of gaps in an applicants loan request. First, it is possible you had a low credit score or short credit history. In this case, you were required to provide a cosigner whose credit was high enough to qualify for the loan. It is also possible your salary was not high enough to provide assurance you could make monthly payments. In this case, you were required to provide a cosigner with a high salary. If your credit has not increased or salary has not gone up, then you will still need a cosigner to keep the loan active. A lender will not allow you to simply assume the loan if you would not qualify on your own for the same loan today.

Modifying to New Cosigner

In this case, you will need to replace the cosigner with another who can provide adequate assurance against default if your existing cosigner declares bankruptcy. For example, you can replace the cosigner with another who has high credit or a stable income. You will need to enter loan modification in order to replace a cosigner. Contact your lender, explain the situation, and be prepared to immediately provide a new cosigner on the loan. 

Optional Cosigner

You may not have been required to have a cosigner when you signed your loan. For example, your credit may have been sufficient to qualify for the loan, but you elected a cosigner to reduce your loan rate. In this case, you could reasonably qualify for a new loan on your own today. It is also common for you to have increased your salary or credit score since initially signing the loan. The loan will also be partly paid off, meaning the remaining balance will be small. In any of these cases, the cosigner is no longer necessary on the loan. You will be able to support the entire loan yourself and provide adequate assurance against default.  

Modifying to No Cosigner

You can modify the loan so you are the sole remaining debtor. You may have to change the terms of the loan, particularly if your credit is slightly lower than that of the previous cosigner. Contact your lender to determine your options in terms of changing the interest rate, monthly payment or terms. Since the terms could be changing, you may need to apply again for the loan instead of just modifying your contract. It is possible to seek a new loan from a different lender if you feel you can get better terms elsewhere.