Financial hardship rarely affects just one aspect of your life. When money becomes tight, you might find yourself facing difficult decisions about bankruptcy—but those decisions become even more complicated when you share ownership of a vehicle with someone else. If you’re considering bankruptcy and you co-own a car with a spouse, family member, or friend, you’re probably worried about what will happen to that vehicle and how your filing might impact the other person’s credit.
The good news is that bankruptcy doesn’t automatically mean losing your car or destroying your co-owner’s credit score. Understanding how bankruptcy law handles jointly owned vehicles can help you make informed decisions that protect both you and your co-borrower.
It is always an option to keep paying the vehicle loan and keep it without harming the co-borrower’s credit score at all, and without changing the interest rate or terms on the loan.
Understanding Joint Ownership and Co-Borrowing
Before we dive into bankruptcy specifics, it’s important to understand the difference between joint ownership and co-borrowing, though they often go hand-in-hand with vehicle purchases.
Joint ownership means both people have legal title to the vehicle. Both names appear on the title document, and both individuals have ownership rights to the car itself. When only one of the two owners of a car files bankruptcy, the only that person’s half of the equity or value of the car is considered for the question of whether or not the vehicle is protected.
Co-borrowing means both people signed the loan agreement and are equally responsible for the debt. When you co-sign or co-borrow on a car loan, you’re promising the lender that you’ll make the payments if the primary borrower cannot.
In most car purchases involving two people, you’re dealing with both situations simultaneously—joint ownership of the vehicle and joint responsibility for the loan. This dual relationship is what creates unique considerations in bankruptcy.
How Bankruptcy Affects Jointly Owned Vehicles
When only one person files for bankruptcy, the bankruptcy estate technically includes their interest in all assets, including jointly owned property. However, this doesn’t mean the car automatically gets sold or that the non-filing co-owner loses their rights.
Your Options for Handling the Vehicle in Bankruptcy
In Minnesota and North Dakota, as in most states, you have several options when filing bankruptcy with a jointly owned vehicle:
1. Reaffirm the Debt and Keep the Vehicle
Reaffirmation means you formally agree to remain personally liable for the car loan despite your bankruptcy filing. You sign a reaffirmation agreement that essentially takes that particular debt out of the bankruptcy discharge. The loan continues exactly as it did before bankruptcy, with the same terms, interest rate, and payment schedule.
This is often the simplest option when you want to keep the car and maintain the status quo for your co-borrower.
2. Redeem the Vehicle
Redemption allows you to refinance the vehicle for it’s current value. This doesn’t work great with a cosigner because the cosigner still owes the unpaid portion.
3. Surrender the Vehicle
If the car payment is unaffordable or you don’t need the vehicle, you can surrender it to the lender. However, this option has significant implications for your co-borrower, which we’ll discuss below.
4. Continue Making Payments Without Reaffirming (in Chapter 7)
In some jurisdictions and circumstances, you may be able to simply continue making payments without formally reaffirming the debt. This approach varies by lender and district practice, so it requires careful discussion with a bankruptcy attorney.
The Critical Point: Protecting Your Co-Borrower’s Credit Score
Here’s what many people don’t realize: As long as the car loan payments continue to be made on time, the non-filing co-borrower’s credit score will not be harmed by the other person’s bankruptcy filing.
This is perhaps the most important thing to understand about jointly owned vehicles and bankruptcy. Your bankruptcy filing only affects your own credit report and score. The co-borrower’s credit remains intact as long as the loan is kept current.
How This Works in Practice
When you file bankruptcy, your credit report will show the bankruptcy filing and may show the car loan as “included in bankruptcy.” However, the co-borrower’s credit report continues to show the loan as an active, performing account (assuming payments are current).
The lender reports payment history to the credit bureaus for each borrower separately. If payments are made on time, the co-borrower’s credit report shows positive payment history. The bankruptcy filing itself doesn’t appear on the non-filing co-borrower’s credit report at all.
This means if you reaffirm the debt, or even if you continue making payments without reaffirming, your co-borrower’s credit score remains protected. The loan continues to age positively on their credit report, potentially even helping their score if they have limited credit history.
What Happens If You Stop Making Payments?
The situation changes dramatically if payments stop. When a jointly held car loan goes into default:
- Both borrowers are equally responsible: The lender can pursue the non-filing co-borrower for the entire debt, regardless of who was making the payments before.
- The co-borrower’s credit is damaged: Late payments and eventual repossession will appear on the co-borrower’s credit report, significantly damaging their credit score.
- The co-borrower has no bankruptcy protection: Since they didn’t file bankruptcy, they remain fully liable for any deficiency balance (the difference between what the car sells for and what’s owed on the loan).
This is why communication with your co-borrower is essential when considering bankruptcy. They need to understand that their financial health depends on the loan staying current.
Chapter 7 vs. Chapter 13: Different Considerations
The type of bankruptcy you file can affect how your jointly owned vehicle is handled.
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, you must decide relatively quickly what to do with secured debts like car loans. You’ll typically need to state your intentions (reaffirm, redeem, or surrender) within 30-45 days of filing.
If you reaffirm and continue making payments, the co-borrower’s situation remains unchanged. Their credit is protected, and they maintain their ownership interest in the vehicle.
Chapter 13 Bankruptcy
Chapter 13 involves a 3-5 year repayment plan. You can include your car loan in this plan, potentially reducing the interest rate or even the principal balance (in certain circumstances).
However, here’s an important consideration: while your Chapter 13 plan payments might differ from the original loan terms, the lender typically continues to expect payments from the co-borrower according to the original agreement if you’re not paying the full contractual amount through your plan.
In Minnesota and North Dakota, bankruptcy courts generally require that joint debts be handled in a way that doesn’t unfairly burden non-filing co-obligors. This protection helps ensure that your bankruptcy doesn’t automatically harm your co-borrower.
Equity and the Bankruptcy Estate
Another consideration is whether you have equity in the vehicle. Equity is the difference between what the car is worth and what you owe on the loan.
If there’s significant equity, the bankruptcy trustee might be interested in selling the vehicle to pay your creditors. However, both Minnesota and North Dakota offer exemptions that can protect vehicle equity.
Minnesota allows you to exempt up to $4,600 of equity in one motor vehicle under state exemptions, or you can choose federal exemptions which allow up to $4,450 in vehicle equity (these amounts adjust periodically for inflation).
North Dakota provides an exemption for one motor vehicle up to $3,450 in value under state law, or federal exemptions with similar amounts to Minnesota.
When you jointly own a vehicle, you only own your portion of the equity. If the car is worth $20,000 and you owe $15,000, there’s $5,000 in equity—but you only own $2,500 of that equity (your half). This amount would fall within the exemption limits, protecting the vehicle from being sold by the trustee.
Practical Steps for Protecting Your Co-Borrower
If you’re planning to file bankruptcy and want to protect your co-borrower’s credit while keeping the vehicle, follow these steps:
- Communicate openly: Discuss your bankruptcy plans with your co-borrower before filing. They deserve to know what’s happening and how it might affect them.
- Continue making payments: Keep the car loan current throughout the bankruptcy process and after discharge. This is the single most important factor in protecting your co-borrower’s credit.
- Consider reaffirmation carefully: While reaffirmation means you remain liable for the debt, it provides certainty for both you and your co-borrower that the loan will continue normally.
- Consult with a bankruptcy attorney: Every situation is unique, and an experienced bankruptcy lawyer can help you navigate the specific requirements in your jurisdiction while protecting your interests and those of your co-borrower.
- Get documentation in writing: If you make arrangements with your lender about continuing payments, get those agreements in writing.
What Your Co-Borrower Should Know
If you’re the co-borrower and the other person is filing bankruptcy, here’s what you need to know:
- You remain fully liable: The other person’s bankruptcy doesn’t eliminate your responsibility for the debt.
- You can take over payments: If you have the financial means, you can ensure payments continue and protect your credit.
- Communication is key: Stay in contact with both the person filing bankruptcy and the lender to ensure you understand what’s happening.
- Your credit can stay intact: As long as payments continue, your credit score won’t be harmed by the other person’s bankruptcy filing.
- Consider refinancing: After the bankruptcy is complete, you might be able to refinance the loan in your name only, removing the complications of joint ownership.
Special Considerations for Spouses
When married couples jointly own a vehicle but only one spouse files bankruptcy, additional considerations come into play. In some cases, the non-filing spouse may be able to make the payments from their own income, keeping the loan current and protecting both the vehicle and their credit.
Minnesota and North Dakota are not community property states, which means debts incurred by one spouse aren’t automatically the other spouse’s responsibility unless they co-signed. However, if both spouses signed the car loan, both remain responsible regardless of marital status or who files bankruptcy.
The Bottom Line
Filing bankruptcy when you jointly own a vehicle doesn’t have to mean disaster for your co-borrower or the loss of your car. The key takeaway is this: as long as the car loan payments continue on time, the non-filing co-borrower’s credit score will not be harmed. It is absolutely an option to keep the vehicle and file bankruptcy without hurting the other person’s credit score.
This is accomplished through reaffirming the debt, continuing payments as part of a Chapter 13 plan, or simply continuing to make payments while working with your lender. The bankruptcy filing itself doesn’t appear on your co-borrower’s credit report, and consistent, on-time payments continue to benefit their credit score.
However, this outcome requires careful planning, clear communication with your co-borrower, and often the guidance of an experienced bankruptcy attorney. The bankruptcy laws in Minnesota and North Dakota provide protections and options, but navigating them successfully requires understanding the nuances of your specific situation.
If you’re facing bankruptcy with a jointly owned vehicle, don’t assume you have to choose between financial relief and protecting your co-borrower. With the right approach, you can achieve both goals and move forward to a more stable financial future.
The information in this article is provided for general educational purposes only and should not be construed as legal advice. Bankruptcy law is complex and varies based on individual circumstances. For advice specific to your situation, consult with a qualified bankruptcy attorney licensed in your state.
