It is only natural for grandparents and parents to want to help their grandchildren and children whenever possible. This includes cosigning debts to help the child get a good start or a “leg up” in the world. Unfortunately, when you cosign for kids, you may find yourself in a very serious financial situation.
Last year a tragic story appeared in the news about a couple facing bankruptcy due to student loans they cosigned for their daughter. Their daughter died suddenly at the age of 27 from liver failure. The couple is now raising their grandchildren, ages 4, 7, and 9, which is a financial burden in itself. However, Mr. Mason cosigned $100,000 in student loans for his daughter to attend nursing school and the student loan company is now demanding repayment of the student loan from Mr. Mason. Bankruptcy does not discharge most student loans so the family is in a dire financial crisis.
Unfortunately, this happens to many grandparents and parents who cosign for kids only to realize later the kids are unable to repay the debt. In the case of the Masons, filing bankruptcy will not help because the student loans are not dischargeable in bankruptcy. In other situations, filing bankruptcy may help grandparents or parents, who cosign for kids to resolve their debt problem; however, it depends on their specific circumstances.
Filing Bankruptcy on Debts Parents or Grandparents Cosign for Kids
The Masons never expected their daughter would die leaving her father solely responsible for the student loan debt. Likewise, parents and grandparents who cosign for kids do not typically anticipate the child may file for bankruptcy relief, but it happens. In such cases, the grandparent or parent is forced to deal with the cosigned debt.
When the child files bankruptcy, all debts must be included in the bankruptcy filing. This includes any debts cosigned by other parties. Parents and grandparents who cosign for kids are notified of the bankruptcy filing. The court requires the debtor to list cosigners on the bankruptcy schedules because the cosigner is potentially liable for the full balance of any cosigned debt.
The child’s bankruptcy case discharges his or her legal responsibility to repay the cosigned debt but it does not discharge the cosigner’s legal obligation for the repayment of the debt. For example, a father cosigns a credit card application with his daughter so that she will have an emergency credit card while at college. When his daughter graduates college, the father forgets to cancel the credit card or remove his name from the account. Five years later, the daughter files for bankruptcy and lists the cosigned credit card debt.
The daughter’s bankruptcy discharge releases her from the legal obligation to pay the credit card debt. However, because the father is the cosigner on the account, the credit card company begins collection actions against the father for the full balance owed on the account. The father has the choice of paying the balance due on the account or ignoring the collection attempts. If he ignores the situation, his credit will be ruined and he may face a collection lawsuit.
Should Parents and Grandparents Cosign for Kids
Deciding if you should cosign for kids is a personal decision; however, you should know all of the facts before making your decision. Remember, the worst-case scenario is that you will be responsible for the entire balance of the debt. If your child defaults on the loan or files bankruptcy and you cannot afford to repay the cosigned debt yourself, you may want to consider other options to assist your child.
Contact Our Office for a Consultation with an Experienced Illinois Bankruptcy Attorney
The bankruptcy lawyers of Pioletti Pioletti & Nichols represent individuals who need help solving their debt problems. We assist clients throughout McLean, Woodford, Tazewell, and Peoria counties by providing compassionate, competent legal services. Contact our office at 309-938-4838 to schedule your free consultation.
When you need the assistance of an experienced bankruptcy attorney in central Illinois, call Pioletti Pioletti & Nichols. We are dedicated to providing our clients with exceptional service and support throughout the bankruptcy process.