Creditors view you as a high-risk borrower if you have previously filed bankruptcy because you have a track history of failing to repay your debts. Consequently, you have may trouble obtaining financing after a bankruptcy. Your inclusion as a co-signer on a loan application could cause the lender to decline the application regardless of your co-borrower's credit history. Nevertheless, a past bankruptcy does not necessarily preclude you from obtaining future credit.
Co-signers
Lenders use the term "co-signer" to describe people who borrow money without having an ownership stake in the collateral being financed. Generally, people add co-signers to their loan applications if the addition of a co-signer somehow improves their chances of obtaining credit. A co-signer with a good credit score can strengthen a loan application, as can the addition of someone with a high income level. If you co-sign on a loan, your past bankruptcy weakens the application although you may also help it the application if you have a high income level and minimal debt.
Financing
Each lender sets its own underwriting standards, but few major lenders offer financing to people who have had a bankruptcy within the last two years. However, if you apply for a loan alongside a creditworthy individual, the lender may allow you to co-sign because the other borrower's credit and income offsets your credit score. In such instances, you can "coattail" the co-applicant's credit, which means you gain access to credit you could not otherwise access. The new loan appears on your credit report and if you and the co-applicant pay the monthly bill on time, the positive payment history starts to raise your credit score. Thereafter, you can obtain credit in your own right much more easily.
Subprime Lenders
You can co-sign on a car loan or even obtain a car loan in your own right if you apply for a loan with a subprime lender. These firms offer credit to people who have credit scores below 620 and to people who could not otherwise qualify for loans because of past bankruptcies or similar events. Subprime lenders mitigate the risks involved in lending to people with poor credit by charging very high interest rates. View subprime lenders as the lenders of last resort because aside from high interest rates, many of these lenders also assess hefty upfront fees and prepayment penalties.
Considerations
Most debts remain on your credit report for seven years, but Chapter 7 bankruptcies remain on your credit report for 10 years. The rules that lenders impose to make financing difficult for people with bankruptcies are designed to protect the lender rather than to help you. However, if you had trouble managing your debts in the past, you may have trouble in the future.
Before taking on new debt, seek out the services of post-bankruptcy counselors, who can give you advice on how to better handle your finances in the future. Coattailing as a co-signer on a car loan may seem like a quick and easy way to start building your credit, but if the co-borrower defaults on the debt, you are responsible for repaying the loan. That could lead to new financial problems.
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