When you’re young and just starting out it can seem like having a co-signer is often necessary to accomplish anything. You need one to get a car and an apartment. It’s common to need them for student loans, too.
And when you took out that loan, you had the best of intentions. In your head, the whole cosigner bit was just a formality. You’d handle it yourself, and your parents or grandparents or whomever helped you out would never have to think about it again.
Now you’re drowning in a sea of financial trouble, and you’ve got no choice but to file for bankruptcy. What happens now?
Factor #1: Your Bankruptcy Chapter
A big part of what happens next will depend on whether you file Chapter 7 or Chapter 13.
Both give you and your cosigner temporary reprieve through both the automatic stay, which applies to you, and the co-debtor stay, which keeps creditors from going after your cosigner until either the case is decided, or they receive permission from the state to do so.
If you file Chapter 7 then this co-debtor stay will remain in effect until you receive your discharge. After that, your legal liability for the debt goes away, but your co-signer’s doesn’t. They’ll still have to pay the balance.
If you file a Chapter 13, and choose to pay the debt in full during the course of your plan, then your co-signer should be left alone so long as you’re making payments.
Factor #2: Whether the debt was secured or unsecured.
If the debt was unsecured, and isn’t paid off in full during the bankruptcy then the co-signer will be liable for the entire remaining balance. This might be mitigated, somewhat, if the trustee sold some of your property to pay off the debt. But if you didn’t have any property to sell, then your co-signer will be looking at a balance that’s exactly as high as the one you brought into bankruptcy.
If the debt was secured you may have the option of reaffirming the debt and keeping the property. The co-signer will be left alone as long as you make the payments.
If the debt was secured, you surrendered that property (i.e. a car or a house) and the creditor sold it off, then the co-signer will be liable for the deficiency balance.
Factor #3: Whether creditors challenge the co-debtor stay.
In some cases, creditors fight for the right to go after your co-signer early. They have grounds to do this if:
- The co-signer benefited from the debt, not you.
- The debt did not get included in a Chapter 13 plan, and therefore offers no provisions for repayment.
- The creditor’s interest would be harmed if they are not allowed to go after the co-signer. This most often happens in Chapter 13 plans where you stop making the payments.
A good attorney can help you protect the co-debtor stay.
Don’t hold back on bankruptcy just because you have a cosigner.
The consequences of failing to file can be even worse than the consequences of filing. When a cosigned debt turns delinquent lenders often sue the cosigner first, instead of coming to you first. And they’ll be sued for the full amount of the loan, not half.
Just make sure your attorney knows co-signers are involved.
This is a major piece of information, one that could play a big role in helping your lawyer choose the right strategy for your bankruptcy case. If you want to maintain a relationship with the person who helped you out, then it’s vital to take the right steps to protect him or her from the consequences of your bankruptcy.
Because while your bankruptcy won’t show up on their credit report, the burden of being suddenly saddled with a delinquent debt they’d hoped never to pay will. They can take a credit score hit, and they’ll be stuck paying for something that doesn’t bring them any benefits. That will put a strain on any friendship or familial tie, so be careful and thoughtful about how you proceed.
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