Effect on Your Auto Loan if the Cosigner Files Bankruptcy

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When a co-signer on your auto loan files for bankruptcy, how the lender chooses to proceed will mainly depend on the way you have paid the loan. There can be complications if the loan-to-value is not within the lender’s guidelines, however you have some ways to make them comfortable enough to leave your loan terms as is.

Bankrupt Co-Signer

Just because your co-signer has fallen on hard times does not mean the lender will ask you to payoff the loan. Depending on how well you have kept up the payments, they may be willing to refinance the loan in your name only, for a minimal fee.

Pay Down the Loan Balance

If it is possible, pay down the loan by making a principal reduction. This may make the lender comfortable enough with the loan-to-value ratio that the loss of the co-signer will not be a problem.

Find a Different Co-Signer

If you can have another person co-sign, the lender will evaluate their creditworthiness to see if they qualify for an approval. The terms of the loan may change, depending on how strong your new co-signer is. Your goal is to keep possession of the car, so keep that in mind if the new loan payment happens to be a bit higher.