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27

Dec 2013

Bankruptcy and your co-signer’s credit report

Posted by / in Chapter 7 Bankruptcy / 2 comments

 What happens to your co-signers when you file a Chapter 7 bankruptcy?  Can you avoid damaging your co-signer’s credit report?

It used to be that if you filed bankruptcy, your co-signer’s credit report would immediately show the account as “included in bankruptcy.” That happened even if you or the co-signer kept paying the account on time.  It was automatic.

Why?

The standard credit reporting system, then known as Metro, provided for credit reporting by accounts.  If an account was in bankruptcy (because one of the people on that account filed bankruptcy), the bankruptcy showed up on the report of everyone who was on that loan.

That problem is NOW  rare.

In the late 1990’s, the credit bureaus phased in a new system called Metro 2.  Metro 2 was designed to allow for “complete identification of each consumer (including co-debtor, co-signer, etc.)”  So the account could–and should–be reported are bankruptcy on the person who filed bankruptcy and current (if it is current) on the person who did NOT file bankruptcy.

Protect your co-signer's credit report

The Consumer Industry Association established Metro 2 in the late 1990’s–so a debt could show bankruptcy on the person who filed bankruptcy, and current if the cosigner is paying it current.

The credit bureaus did this for two reasons.  First, because it was more accurate; second they were afraid of getting sued.  (And they did get sued, in a case called Clark v Experian.    You can read about that here.)

Still, if you file a bankruptcy, and you have a co-signer, and you, or the co-signer, is still paying the debt, check your co-signer’s credit report.  Better check it twice, actually.  Once about the time of your bankruptcy hearing.  And again, three months after your bankruptcy discharge.  (I explain here where to go to get the right credit reports to check.)  WARN your cosigners!

I still see this problem, maybe once a year.  (The reason I’m writing this blog, actually, is this problem popped up today, December 27, the first time I’ve seen it in 2013.)

One reason may be that some credit card companies may still be using Metro, instead of Metro 2.  In 2006, the Federal Reserve reported to Congress that half the credit reporting was still being done on the old Metro system.

If half the companies had not updated seven years after the new system was put in place, I suspect many still haven’t, another seven years later.

 

PS  What if no one pays the debt?  Your co-signer’s credit report will definitely get hit!

If nobody pays the co-signed debt, then there will and should get a bad notation on the co-signer’s credit report.  The debt will show up as bankrutpcy on you, and as late–and probably charge off–on your co-signer.  “Charge off” is a “major derogatory” on someone’s credit.  Maybe as bad, or worse, than a bankruptcy.

 One More Reason I like the Credit Report at Experian.com/reportaccess.

I like to talk about this during my consultation with people who are thinking of filing bankruptcy.  And the experian.com/reportaccess credit report is usually accurate on telling us when you have cosigners.  (Sometimes people have forgotten.)  Other credit reports aren’t as good, including other Experians.

 

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Robert Weed has helped twelve thousand people file bankruptcy in Northern Virginia. Robert Weed is a frequent panelist and speaker at the meetings of the National Association of Consumer Bankruptcy Attorneys. He is one of Northern Virginia’s most experienced personal bankruptcy lawyers. As an expert on changing consumer bankruptcy laws, Robert Weed has been interviewed on local and national TV and quoted in newspapers across the country.

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2 comments
  • Gwendolyn

    November 5, 2015, pm30 6:32 PM
    01

    I cosign for someone in 2004, The filed bankruptcy IN 2009 OR 2010, The
    CREDITOR have contacted me for payment. What are my options?

    • Robert Weed

      November 6, 2015, pm30 10:09 PM
      02

      Gwen:

      Don’t know where you are or what the debt was. In a lot of places, if they leave you alone for more than five years, they are too late. S O L–means statute of limitations. You need to find out what the S O L is for your state on that kind of debt.

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