How Can Creditors Collect Debts From a Loan’s Co-Signer?

 Posted on February 15, 2022 in Debt Collection

Creditors take on risk when they loan money to debtors, and they may use a variety of methods to protect their interests and ensure that they will receive the payments owed. In cases where debtors do not have sufficient credit history or where a creditor believes that a person may not be able to repay their debts, a co-signer may provide a guarantee that the amount owed will be paid. In cases where the primary debtor defaults on a loan or files for bankruptcy, creditors will need to understand their options for collecting the debt from the co-signer.

When Is a Co-Signer Liable for a Debt?

Generally, creditors are able to collect debts from either the primary borrower or a co-signer. However, they will need to meet the requirements of the laws in their state when collecting from a co-signer. In Illinois, debtors cannot take collection actions against a co-signer unless they notify the co-signer that the primary debtor has defaulted on the loan. This notice must be sent to the co-signer through first-class mail, and a creditor must give the co-signer 15 days after the date the notice was sent to pay the amount owed or make arrangements to do so. If a co-signer does not respond to the notice or fails to take steps to pay what is owed, a creditor may take a number of actions, including notifying credit agencies, contacting the co-signer directly to seek payment or initiating a civil case to collect a money judgment.

A creditor’s ability to collect debts from a co-signer may be affected by a bankruptcy petition filed by the primary debtor. After a debtor files for bankruptcy, the creditor will be prevented from taking collection actions by an automatic stay. If the debtor files for Chapter 7 bankruptcy, a creditor may take steps to collect debts from a co-signer if the case is dismissed or if the primary debtor receives a discharge of their debts. If the debtor files for Chapter 13 bankruptcy, a codebtor stay will remain in effect preventing a creditor from taking collection actions during the primary debtor’s repayment plan. However, if a Chapter 13 case is dismissed or converted to Chapter 7, a creditor may be able to collect debts from a co-signer. A creditor may also be able to file a lift stay motion asking the court to allow them to pursue repayment from a co-signer.

Contact Our Chicago, IL Co-Signer Collections Attorneys

At Dimand Walinski Law Offices, P.C., we work to protect creditors’ rights in cases involving bankruptcy and debt collection. We can help creditors determine their options for collecting debts from co-signers, and we will make sure they take the correct steps to receive what is owed to them and minimize their financial losses. Contact our Chicago debt collection lawyers today at 312-704-0771 to arrange a confidential consultation.

Sources:

https://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=2356&ChapterID=67

https://www.law.cornell.edu/uscode/text/11/1301

https://www.consumer.ftc.gov/articles/cosigning-loan-faqs