How Co-signed Debt is Treated When Claiming Bankruptcy

| Category: Debts In Bankruptcy
Category: Debts In Bankruptcy | (18) comments

This is a very common question and causes significant concern when people have co-signed debts and are considering claiming bankruptcy in Ontario.  Normally, the co-signer is a family member or a close friend. The potential impact of the borrower deciding to file personal bankruptcy can put an added strain on the relationship above those already felt by dealing with the underlying debt.

In law, a co-signer agrees to be responsible for the debt if the primary lender cannot pay the debt.

What happens if someone co-signed my loan So what happens to the co-signer if the primary lender files for bankruptcy? They (the co-signer) become responsible for the debt.

A bankruptcy restricts creditors from collecting from primary lenders but it does not change the bank’s right to collect against the co-signer.  Therefore, the co-signer will be held responsible for making payments or for paying out the loan in full.

Common examples where the bank requires a co-signer or joint lender are:  consolidation loans, student lines of credit, and lines of credit for married couples.

Unfortunately you cannot voluntarily exclude an unsecured debt from your bankruptcy. Even if you could it may not be the wisest course of action. If you are struggling with debt repayment, it is more than likely that you will begin to miss payment anyway, potentially triggering your lender to begin the process of seeking payment from your co-signer.

Your best option is to advise your co-signer ahead of time so they are not unduly surprised by a call from your lender. Correct your financial issues and then work towards correcting your relationship.

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    1. J. Douglas Hoyes, Trustee

      Hi Sandy. If it was not your car (you were co-signing for someone else) then the loan from your perspective is an unsecured debt, which would be included in your bankruptcy. To verify this, when you meet with your trustee show them whatever paperwork you can find, so they can confirm that the debt will be discharged in your bankruptcy.

      Reply
  1. Nick

    (In Ontario) If a father cosigns for his son on a house , and his son declares bankrupt… are creditors able to go after the fathers RRSPs and TFSAs?… also could creditors go after the mothers RRSPs and TFSAs if they are not joint to the fathers (she is not on the cosign)

    Reply
    1. J. Douglas Hoyes, Trustee

      Hi Nick. The creditors can go after a co-signer if there is a shortfall. If the son goes bankrupt but continues to make the mortgage payments, there is no shortfall, so the creditor would not pursue the co-signor. Similarly, if the house was sold and the mortgage was paid in full, there would be no reason to pursue the co-signor. It would only be if there was a shortfall that the creditor could pursue the co-signer, and they would attempt to seize whatever assets they could (although a court order would probably be required).

      Reply
  2. leah

    10 years ago my current husband and I separated and I had to claim bankruptcy. One of the debts was for a CIBC loan for $45000.00, my husband was the co-borrower. At the time of our separation he had no source of income and was not contacted by CIBC. After 2 years we reconciled, and married 5 years ago. Just yesterday I was contacted from NCO Financial Collections saying that he is responsible for the $47000.00. We have not received any correspondence from them too date. This was the first contact. Do the stature of limitations laws come in to play here or do they have a right to pursue this so many years later?

    Reply
    1. Ted Michalos, Bankruptcy Trustee

      I think you should start by asking NCO for a Statement of Account and some sort of proof of the debt. Based on that you can decide whether or not your spouse owes the money. Debts themselves don’t expire, but the ability to collect on them can. In Ontario there is something called the Limitations Act. A creditor has 2 years from the date that you last acknowledged the debt to commence legal actions to collect, or you can use the Limitations Act as a defence against their claim (ie it has been more than 2 years so I assumed the debt was gone). So, if the creditor didn’t take action against your spouse in the required two years you can argue that the Limitations Act applies. To force the issue you may have to have your spouse send a registered letter to NCO advising them he disputes the claim and instructing them to either take him to Court or desists collections. If they take him to Court that is when he may argue that the Limitations Act applies.

      Reply
  3. Matt

    If a creditor accepts a consumer proposal that pays the debt in full, can they still harass and go after a cosigner for the total amount, essentially getting paid twice?

    Reply
    1. J. Douglas Hoyes, Trustee

      Hi Matt. A creditor cannot collect more than the full amount owed. However, if the co-signer is not part of the proposal, the creditor can continue to attempt to collect from the co-signer until the proposal is paid in full and they receive all of their money. Your consumer proposal administrator can provide more details on the timing of the proposal payments to the creditor, and what actions you can take to minimize the impact on the co-signer.

      Reply
  4. Loriana

    I was falsely used to obtain a car loan for a friend of mine back in 2010-2011. My friend had bad credit and went to an easy car place where they told me that they will use my name so it looks better on his application but will not be used against me. This was all a lie because now years later and the vehicle surrendered back to the company. They are
    Now threatening to garnish my wages at more than triple 9f what the car is even worth. My friend had delayed bankruptcy last year and now they are after me. How can I stop this?

    Reply
    1. J. Douglas Hoyes, Trustee

      Hi Loriana. If you believe you are the victim of fraud, you should contact the police. It may also be wise to consult a lawyer. The next option would be to talk to the car company and explain that you were the victim of fraud, and that you intend to get legal advice and inform the police; that may be enough to make them leave you alone. Also, under Ontario law, a creditor must commence legal action within two years of the date of the last payment, so if no payments were made on this loan in the last two years, that could be your defense in court if they sue you. Again, legal advice may be helpful.

      Ultimately if the car place gets a judgement against you, and you have no way to defend it or pay it, you may need to consider a consumer proposal or bankruptcy yourself.

      Reply
  5. Joe

    If someone claims personal bankruptcy and is also the sole owner of a Incorporated company, what happens to the company’s credit and assets?

    Reply
    1. J. Douglas Hoyes, Trustee

      Hi Joe. In simple terms the shares in the corporation become assets in the person’s bankruptcy estate. The incorporated company continues to exist as a separate entity, with the shares controlled by the trustee. In practice it is never that simple, so where a corporation is involved you will want to meet with a licensed insolvency trustee for a full review of the situation, which can get complicated.

      Reply
  6. Mya

    My aunt cosigner me a car loan. I paid more than half of the financing already but because I was on mat leave I could no longer keep up with the payments which resulted to car repossession. The car eventually sold but still left a balance. On my end I wan to file consumer proposal for all of my debt including the balance for the car that was repossessed. Question, can the creditor decline the proposal and opt to go after my aunt? Can I exclude the car from the proposal? Or what could happen impacting my aunt?

    Reply
    1. J. Douglas Hoyes, Trustee

      Hi Mya.

      Yes, you can include the shortfall for the car in your consumer proposal. In fact, you are required to include all of your unsecured debts in the proposal.

      As for your aunt, since she was a co-signer, yes, the car lender can go after her for the difference. There are many different strategies to deal with this. I suggest you contact an Ontario Licensed Insolvency Trustee for a no charge initial consultation to review options for both you and your aunt.

      Reply

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