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Columns: Bankruptcy Adviser
Justin Harelik   Expert: Justin Harelik
Bankruptcy Adviser
Bankruptcy doesn't release co-signer from obligation
Bankruptcy Adviser

Co-signer's liability in a mortgage

Dear Bankruptcy Adviser,
My wife and I are considering bankruptcy, but my father has co-signed on our mortgage. If we did declare, how long do you think it would be until we could release him from the loan?
-- Alex

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Dear Alex,
Unfortunately, Alex, you are a victim of some very wishful thinking. Yes, it is possible that your father may not ultimately pay anything. This question is difficult to answer for everyone across the country because state laws vary considerably. But if you file bankruptcy, your father could still be 100 percent liable for the debt.

You will not be able to simply remove (or release) him from the loan. You did not qualify for the initial loan without his signature and now, you cannot afford to pay the mortgage payments. However, your father has also promised the mortgage company that he would make the payments in the event that you could not. He could face a precarious financial situation unless you act appropriately and immediately.

It would be prudent to consult with an attorney, accountant or financial adviser. You must know the specific exposure your father has in your particular state.

In general, you need to list the property for sale before filing for bankruptcy. If the mortgage balance is higher than the property's value, a deficiency balance may exist after any sale. A deficiency is money a borrower who has lost or sold real estate still owes to the lender because the sale failed to generate enough to pay off the loan. By listing the property immediately, before you start missing payments, you have the best chance of selling the house for market value, saving your father's credit and eliminating his potential liability.

However, during the sale process, someone must continue to make the mortgage payments. Either you or your father must keep the account current; otherwise, his credit will be harmed. The mortgage company will simply start to report delinquent marks on his credit report. He will be contacted and demands will be made that he begin making the payments. If he is a homeowner and there is equity in his home, then his case could be a perfect candidate for a collection agency to sue him for the deficiency, place a lien against his home and, in some states, force him to sell his house to pay the debt.

You need to take a very hard, but commonsense approach to your problem. Your father did a very nice thing by co-signing on your loan. However, why should the mortgage company simply let the debt go because you are no longer going to pay? When you got the loan, the mortgage company did not believe you qualified due to your income, credit, assets or a combination of all three. Your father's credit helped to qualify you for the loan while giving the mortgage company more confidence that you, or someone, would pay back them back.

Alex, you must act immediately, because you have the most options available before you start missing mortgage payments. Work with your father to find the best solution.

Bankrate.com's corrections policy -- Posted: Dec. 18, 2007
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