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How Does Filing for Bankruptcy Affect a Cosigner?

Vivona Pandurangi, PLC Jan. 16, 2024

Unhappy Couple Calculating BillsWe understand that filing for bankruptcy can be an overwhelming process, filled with uncertainty and concern. This is especially true if you have a co-signer on your debt.

You might be wondering what will happen to them and how this decision could impact their financial future. We know that these concerns weigh heavily on your mind, and we're here to help. 

At Vivona Pandurangi, PLC, we're more than just a law firm. We're a team of dedicated bankruptcy attorneys who are committed to helping individuals navigate the ins and outs of bankruptcy law. Our goal is to provide you with the necessary information and legal guidance needed for your unique situation. 

Understanding Bankruptcy and Co-signers

When you're considering filing for bankruptcy, it's natural to be concerned about how this decision will impact your co-signer. It's not a decision to be taken lightly, as the outcome can affect both your financial future and theirs. To help you understand this complex topic, we've broken it down into more manageable sections: 

  • Shared Responsibility: When you take out a loan with a co-signer, they share the responsibility for your debt. They are essentially agreeing to step in if you can't make the payments. This is a common practice when the primary borrower has a low credit score or insufficient income to secure the loan alone. 

  • Discharge of Debt: Filing for bankruptcy can lead to the discharge of your debts, meaning you're no longer legally required to pay them. However, this discharge applies only to you, not your co-signer. They remain liable for the debt even if you're no longer obligated to pay. 

  • Creditors' Rights: After your debt is discharged via bankruptcy, creditors can still pursue your co-signer for payment. This is because your bankruptcy does not change the co-signer's agreement with the creditor. They are still legally obligated to repay the debt if you don't. 

Consult with an experienced bankruptcy attorney to understand your options and receive guidance on which pathway is best for you. 

The Impact of Chapter 7 Bankruptcy on Co-signers

We often get queries about how Chapter 7 bankruptcy, also known as liquidation bankruptcy, affects co-signers. It's a critical area to understand, as your decision to file for bankruptcy can significantly impact your co-signer. The following is a comprehensive understanding: 

  • No Protection for Co-signers: In Chapter 7 bankruptcy, your co-signer doesn't receive any protection from your creditors. This means they're still responsible for the debt during and even after your bankruptcy proceedings. The automatic stay that stops collection activities against you doesn't extend to your co-signers. 

  • Co-signers and the Automatic Stay: The automatic stay is a legal provision that halts creditors from collecting debts temporarily. It comes into effect as soon as you file for Chapter 7 bankruptcy. However, it's crucial to note that this automatic stay doesn't extend to your co-signers. This means creditors are free to pursue your co-signer for payment. 

  • Discharge of Debt: When you file for Chapter 7 bankruptcy, your responsibility to pay your debts gets eliminated. This process, known as discharge, offers you a fresh start by wiping out your debts. Unfortunately, this discharge doesn't apply to your co-signer. They remain legally obligated to repay the debt, and your discharge won't impact their payment responsibilities. 

  • Collection Activities Post-Bankruptcy: After your debts are discharged in Chapter 7 bankruptcy, your creditors can still go after your co-signer for payment. This is because your bankruptcy does not change the co-signer's agreement with the creditor. Remember, when they agreed to be your co-signer, they took on the obligation to repay the debt if you couldn't. 

  • Protecting Your Co-signer: If you're worried about the impact on your co-signer, there are steps you can take to protect them. For instance, you can choose to reaffirm the debt. This means you give up the benefit of your discharge and make yourself personally liable for the obligation again. Alternatively, after a Chapter 7 discharge, you can voluntarily continue paying off the debt to protect your co-signer. 

Please remember that these are general guidelines, and the specifics can vary depending on various factors.  

The Role of Chapter 13 Bankruptcy and Co-signers

As a law firm dedicated to helping individuals navigate the complexities of bankruptcy, we understand the concerns you might have about how Chapter 13 bankruptcy will affect your co-signer. Here's an in-depth look at this topic: 

  • Protection for Co-signers: Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy provides some protection for your co-signers. This type of bankruptcy involves creating a repayment plan that allows you to pay off your debts over three to five years. As long as you stick to this plan, your co-signer is generally shielded from collection efforts. 

  • The Chapter 13 Co-debtor Stay: When you file for Chapter 13 bankruptcy, the automatic stay (a temporary halt on collection activities) extends to co-signers as well. This is known as the "Chapter 13 co-debtor stay." It protects co-signers from creditors attempting to collect consumer (non-business) debts. 

  • Conditions for Lifting the Co-debtor Stay: Creditors can ask the court to lift the automatic stay under certain circumstances. These include situations where your co-signer received benefits from the creditor's claim, you're not proposing to pay the debt in full through your Chapter 13 plan, or the creditor will suffer irreparable harm if the stay remains. 

  • Ending of the Co-debtor Stay: The co-debtor stay ends if the court dismisses your case or converts it from Chapter 13 to Chapter 7 bankruptcy. 

  • Repayment Plan: Under Chapter 13 bankruptcy, you'll work out a repayment plan based on your income and expenses. This plan allows you to catch up on past-due payments and keep the property you're making payments on. It also provides more time to make payments, which could be beneficial for your co-signer. 

  • Impact on Credit: Filing for Chapter 13 bankruptcy can help you rebuild your credit over time. However, it's important to note that if you fail to make payments as required by your repayment plan, it could negatively impact both your and your co-signer's credit. 

The Importance of Seeking Legal Advice

We understand the anxieties and uncertainties associated with filing for bankruptcy, especially when a co-signer is involved. At Vivona Pandurangi, PLC, we're committed to helping you navigate this process, providing you with clear guidance, and helping you make informed decisions. With our deep understanding of bankruptcy law and unwavering commitment to our clients, we're confident in our ability to help you find the best financial solutions for your unique situation.

Our offices are located in Falls Church and Alexandria, Virginia; we serve clients throughout Arlington, Fairfax, Manassas, Prince William, and Loudon. Contact us today for a free consultation and take the first step towards a brighter financial future.