What is my liability if I co-sign on a loan for someone who then declares bankruptcy?

As a co-signer on a loan you are also a “co-debtor”. Unfortunately, a bankruptcy discharge only discharges the debt from the person petitioning for bankruptcy, it does not discharge the loan amount and therefore does not eliminate your liability for the loan. There is, however, an important protection for you, assuming your cousin is employed and filed a Chapter 13 bankruptcy. It is called a “codebtor stay” and it prevents the creditor from pursuing action against you until the bankruptcy case is closed. This can take roughly three to five years from the time the Petition for Bankruptcy is filed.

The exception to this would be if you received the “consideration” or material benefit of the loan, then the bankruptcy court would expect you to maintain the payments of the loan. It is important for you to be aware of the basics of bankruptcy as you move forward as your options will be predicated on the type of bankruptcy your cousin has opted to petition for.

In the event you do make the payments on the loan you do have recourse to recover your losses. While you can not take legal action against your cousin for the amount of the debt (when a loan is discharged in bankruptcy, it is discharged even to the co-signer), as a co-signer forced to pay off a loan obligation during the bankruptcy process, you count as a creditor. Any money the trustee receives is distributed to creditors, and a co-signer is considered a creditor.

As you can see, this process is involved and complicated. In order to protect your interests and your credit rating, you should retain an attorney who specialized in bankruptcy law. A bankruptcy attorney is the most suited to help you prevent being pursued by the lender and recover your out-of-pocket expenses.