What Happens If Your Co-Signer Files Bankruptcy?

May 2, 2012

Many bankruptcy questions are complicated and the right answer depends on the facts of the individual’s case. One challenging issue that frequently arises is how a debtor’s bankruptcy filing will impact a co-signer. Below is some general information on bankruptcy and co-signers:

Basics
A co-signed debt generally makes each signer 100% responsible. If a default occurs, the creditor can legally collect from one or all of the co-signers until the debt is paid.

The Automatic Stay
When a debtor files bankruptcy, the bankruptcy court automatically issues an injunction against all creditors prohibiting any collection attempts. This stay only applies to the debtor, personally, and does not stop the creditor from collecting from property or from other people. However, if the debtor has filed a Chapter 13 bankruptcy case, the automatic stay extends to co-signers and stops collection action (e.g. lawsuits, telephone harassment, repossession, etc.) against them as well. This protection does not apply to Chapter 7 cases.

The Bankruptcy Discharge
A bankruptcy discharge does not "erase" a debt, it makes the debt legally unenforceable against the debtor. The creditor is unable to collect from the discharged debtor, but can proceed to collect 100% of the debt from the remaining non-discharged signers. Co-signers are prohibited from suing the debtor on a discharged debt.

Secured Property
When a co-signed debt is secured by collateral, whether the property is protected by the bankruptcy court depends on whether the property is "owned" by the debtor and whether he or she intends to keep it. If the property is in the hands of the non-bankrupt co-signer, like a vehicle, the property is not protected by a Chapter 7 or Chapter 13 bankruptcy. Additionally, if the debtor abandons and surrenders interest in the property, the bankruptcy protection is extinguished and the creditor may legally repossess.

Other Issues
* A creditor could consider a bankruptcy filing a breach of contract on a co-signed debt and place the debt in default status. Whether this is permitted depends on state law.
* Some co-signed debts may not be discharged during the debtor’s bankruptcy. Common examples are student loans and taxes. Consult your attorney for more information on non-dischargeable debts.
* The debtor’s bankruptcy could affect the co-signer’s credit rating, especially if payments are not made.

Protecting the co-signer’s interests during a bankruptcy case can be tricky business. If your co-signer has filed bankruptcy, speak with an experienced bankruptcy attorney and discuss your legal rights. Your bankruptcy attorney can help you understand the bankruptcy process and how it will affect you.

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