Bankruptcy Affects on Cosigners

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If you have a cosigner on any of your debts or loans, filing bankruptcy may affect them, but there are ways that you can protect your cosigner. The following information will guide you to understand the obligations of your cosigner and what you can do to help protect them if you need to file for bankruptcy.
What is a Cosigner?

A cosigner is a person who is responsible for paying back your debt if you are not able to do so. Creditors sometimes require a co-signer if they are hesitant about your ability to repay a debt or loan on your own.

There is a difference between a cosigner and a guarantor. A creditor can go after a cosigner at any time. With a guarantor, creditors usually go after the primary borrower first and attempt to collect the debt from them. But, in the instance of bankruptcy, this doesn’t matter since both will be obligated to pay the debt if you are unable.
How Does Bankruptcy Affect Cosigners and Guarantors?

Your bankruptcy discharge only clears your obligation to pay the discharged debts. It has no effect on the responsibility or liability of the cosigner or the guarantor. How much protection your cosigner or guarantor receives depends on whether you file for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy

When you file Chapter 7, all collection activities against you stop because of a bankruptcy’s automatic stay. But the automatic stay does not extend to your cosigners or guarantors. This means your creditors are free to go after them to collect the debt.
How Can You Protect Cosigners if You File Chapter 7 Bankruptcy?

Even if you decide to file Chapter 7, you can still take steps to protect your cosigner or guarantor from the collection efforts of your creditors. Here are some options:

  • Reaffirm Debt
    Before getting your discharge in your Chapter 7 you can choose to reaffirm your debts. This means you give up the benefit of your discharge and make yourself personally liable on the obligation again. Reaffirming debt is usually not advised, but it may help you protect your cosigner from your creditors.
  • Pay Off Debt
    After Chapter 7 discharge, you are no longer obligated to pay off any discharged debt. But this does not mean you can’t voluntarily pay off your debts after bankruptcy. If you want to protect your cosigner, you can continue to make payments until the debt is paid.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy has greater protection for your cosigner or guarantor. It gives you the opportunity to pay off cosigned debts through a repayment plan.
Chapter 13 Co-Debtor Stay

When a Chapter 13 is filed, your cosigner or guarantor on consumer debt is protected under the automatic stay. This is called the Chapter 13 co-debtor stay. Keep in mind that your creditors can still ask the court to file the automatic stay under these circumstances:

  • It was your cosigner who actually received the consideration for the creditors claim
  • You are not proposing to pay the debt off in full through your Chapter 13 plan
  • The creditor will suffer irreparable harm if the stay continues.

Also keep in mind that the co-debtor stay will end if your Chapter 13 is dismissed or converted to a Chapter 7.

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