In theory, individuals who cosign vehicle loans should have solid credit. After all, most lenders conduct thorough background checks and adhere to stringent credit-score guidelines before agreeing to lend large amounts of money.
Banks may mitigate their risk by refusing to accept cosigners with questionable credit. Unfortunately, they have few defenses against problems that they can’t see coming. If your vehicle-loan cosigner’s financial situation deteriorates rapidly after they agree to back the loan, you may find yourself in a tight spot.
Remember that you can prevent this situation by refraining from using a cosigner to obtain an expensive loan in the first place. Before agreeing to take on a new credit facility, make sure that your current income is sufficient to cover its monthly payments. You should opt for a cosigner only if a shaky credit score renders you unable to secure a car loan through a traditional lender.
You can take additional steps to protect yourself from a wayward cosigner. Disregard social convention and ask them penetrating questions about their financial situation. If your cosigner is hiding significant amounts of debt or is worried about an impending round of layoffs, politely decline their offer of help and seek out a more financially-secure partner.
Once you’ve taken out your loan, do everything in your power to make timely payments on it. You shouldn’t need to rely on your cosigner for financial support. In fact, habitual reliance on a third party to cover the costs of your loan is a clear indicator that you can’t afford your vehicle.
Assuming that you’re able to cover the full cost of your loan on a month-to-month basis, you won’t be directly affected by your cosigner’s bankruptcy filing. After all, your cosigner’s job is simply to provide your bank with peace of mind and serve as a backstop in the event that you become unable to make your loan payments.
However, if your cosigner has been covering all or part of your loan’s cost and can no longer afford to do so after filing for bankruptcy, your loan will fall into arrears. If you can’t come up with the money to cover the mounting debts associated with it, your lender will eventually repossess your vehicle.
You may also lose your vehicle if you were already behind on your loan payments at the time of your cosigner’s bankruptcy filing. With neither you nor your cosigner able to make timely payments on your loan, your cosigner’s court-appointed bankruptcy trustee may seize your car and use it to cover their outstanding debts.