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Filing bankruptcy? How to protect loved ones who cosign loans

Filing bankruptcy? How to protect loved ones who cosign loans
A bankruptcy filing can have repercussions for loved ones who cosign for a loan.

Wanda says her daughter is the cosigner for two auto loans. Wanda also is considering a bankruptcy filing.

She asks: Will seeking bankruptcy protection affect her daughter's credit?

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Answer: It could.

Bankruptcy filings can be tricky, especially if your finances are intertwined with those of others. It's often wise to consult a bankruptcy lawyer before making any such move.

That said, here are some general pointers:

A Chapter 7 bankruptcy halts debt collectors in their tracks, but it doesn't extend that protection to cosigners. So in that case, Wanda, your daughter's credit can be jeopardized if she doesn't make good on loan payments.

A Chapter 13 bankruptcy, on the other hand, provides more safeguards for cosigners because it creates a repayment plan for your debts and thus doesn't automatically throw everything in the lap of a cosigner.

There are loopholes and catches with both types of filings, so, again, it's prudent to spend maybe a couple hundred dollars for a lawyer's advice.

And one final thought: It's seldom a good idea for loved ones to cosign loans. Why? See above.

If you have a consumer question, email me at asklaz@latimes.com or contact me via Twitter @Davidlaz.

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