How Co-Signers Are Affected in Bankruptcy: The Co-Debtor Stay

What Happens to Cosigners and Joint Account Holders in Bankruptcy?

When you file for bankruptcy protection, the bankruptcy discharge only eliminates your liability on discharged debts.   Your lender or credit provider can still pursue your cosigners and joint account holders to recover monies still owed on their loan. The extent to which cosigners or joint account holders can benefit from your bankruptcy depends on whether you file for Chapter 7 or Chapter 13 bankruptcy.
When unforeseen life events happen that cause financial hardships, a bankruptcy might be just the thing you need to get back on track. When considering a bankruptcy, the issue of co-debtors will arise.  If the debt is co-signed by spouses who are filing a joint bankruptcy petition, the issue of the co-debtors and bankruptcy is not a problem as both debtors will receive a discharge of the debt. However, if only one co-debtor files bankruptcy, this could leave the other co-debtor responsible for the entire debt.

Co-Signers and Chapter 7 Bankruptcy

As you most likely already know, co-debtors do not need to be spouses.  You can have co-debtors that include parents, friends, other relatives, business partners – anyone who agrees to co-sign debt for another person.  If only one co-signer files for bankruptcy under Chapter 7, Chapter 7 bankruptcy does not provide any protection to cosigners or joint account holders. When you file for Chapter 7 bankruptcy, you are protected by the automatic stay. However, your creditors are free to go after your cosigners and joint account holders to collect their debts. In fact, since creditors are prohibited from pursuing you, they will direct all collection efforts towards your cosigners and joint account holders.
Once the Chapter 7 case has been closed and the debtor receives a discharge, the debtor’s legal responsibility for the co-signed debt is released.  Unfortunately, the co-signer is not released from his or her legal liability for the debt and the creditor can legally pursue the co-signer for the entire balance due on the account.  If the debt is not paid, the creditor may file a lawsuit to seek a monetary judgment against the co-debtor and also report on their credit. In this case of co-debtors and bankruptcy, the debtor can voluntarily choose to pay the co-signed debt to protect the co-signer or the co-signer can choose to pay the debt in order to protect themselves from action by the creditors.
If you wish to remain liable on an existing debt after bankruptcy, you have the option to reaffirm it by signing a new agreement with your lender. The most common type of debt people reaffirm is their car loan because they wish to keep their car after bankruptcy. If you have cosigners or joint debtors on an account, reaffirming that debt can alleviate some of their burden by keeping you on the hook.

Co-Signers and Chapter 13 Bankruptcy

If the debtor files under Chapter 13, the protection afforded to the debtor is extended to the co-signer however, this is only for consumer debts.  If the co-signed debt is a consumer debt, the co-debtor is protected as long as the debtor remains in bankruptcy.  In most cases, when the debtor completes the bankruptcy plan and receives a discharge, the co-signer will be absolved of the debt if the debt was paid in full through the plan.  Please note however that if the debtor did not repay all creditors back in full then the co-debtor will still be responsible once the case is discharged. When you file for bankruptcy, your discharge only wipes out your obligation to pay back discharged debts. This means that if you have a cosigner or a joint account with another person, he or she will typically remain on the hook for that debt.  If you are attempting to cram down a car or other asset in bankruptcy you need to discuss this with your attorney because if there is a co-signer on this debt that is NOT filing a bankruptcy then this cram down will be for nothing when you exit your case.  

The Chapter 13 Codebtor Stay Protects Co-signers

If you file for Chapter 13 bankruptcy, a codebtor stay immediately goes into effect and protects cosigners and joint account holders on all consumer (non-business) debts. As long as the codebtor stay is in effect, your creditors are prohibited from attempting to collect their debts from your cosigners or joint account holders even though they did not file for bankruptcy themselves. Remember that the Chapter 13 codebtor stay will end if your case is closed, dismissed, or converted to a Chapter 7 bankruptcy.
It is always a good idea to contact an attorney who is knowledgeable about the ins and outs of Chapter 7 and Chapter 13 bankruptcy when you are considering filing a bankruptcy case.

If you have any questions about Chapter 7 bankruptcy or Chapter 13 bankruptcy please feel free to go to https://saedilawgroup.com or contact us at info@saedilawgroup.com

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