Chapter 7 bankruptcy discharges most unsecured debts, like credit cards, and allows you to keep secured debts like car loans and home mortgages if you agree to repay the loans. If you have a cosigner on your debts, your cosigner will still be responsible for the debt, despite your bankruptcy filing.
(To learn more about what happens to debts in Chapter 7, see Your Debts in Chapter 7 Bankruptcy.)
How the Chapter 7 Discharge Works
When you successfully complete a Chapter 7 bankruptcy case, the end result is that the court enters a discharge of your debts. The discharge applies to general unsecured debts, such as credit cards, medical bills, personal loans, and some income taxes and utilities. It generally does not apply to student loans or to any other income taxes. And it never applies to child support, alimony, criminal fines, and certain other nondischargeable debts. (Learn more about which debts can be discharged in Chapter 7 bankruptcy.)
Once the court enters your discharge, your liability on your dischargeable debts is gone. This means that you are no longer legally obligated to repay those debts, and your creditors cannot collect them from you.
The Discharge Only Applies to the Debtor's Obligation on the Debt
The discharge does not make the debt disappear, however. The discharge applies to your liability on the debt, not the debt itself. The discharge is personal to the individual who filed bankruptcy. This means that if any other person was liable on the debt, such as a co-borrower or cosigner, that person is still responsible for the entire balance due unless that person filed bankruptcy with you.
You Must Disclose Cosigners in Your Bankruptcy Filing
As part of your bankruptcy paperwork when you file your case, you must file a Schedule H, which lists co-debtors, or co-borrowers. This includes cosigners. The bankruptcy court will use this information to notify your cosigner that you have filed bankruptcy. (To learn more about the bankruptcy forms, see Completing the Bankruptcy Forms.)
Cosigner Liability for Unsecured Debts
If you have a cosigner on an unsecured debt that is discharged in bankruptcy, your cosigner will still be responsible for the balance due. The creditor will not be able to collect the debt from you, but it can collect it from the cosigner.
Example. Joe obtained a personal loan from a bank. His brother Charles cosigned on the loan. Joe filed Chapter 7 bankruptcy, and the bank could no longer collect on the loan from Joe. The bank can now begin the collections process on Charles.
Cosigner Liability for Secured Debts
Secured debts are debts that you obtain by pledging property as collateral for the loan. The most common types of secured loans for consumers are mortgage loans and car loans. When you buy a car or a house and finance the purchase price with a loan, you give the lender an interest in the car or house in exchange for the loan. If you default on the loan, the lender can take the collateral.
If you have a cosigner on a house loan or a car loan and you file Chapter 7 bankruptcy, the cosigner is still responsible for the debt. If you choose to keep the house or car and repay the loan, the situation does not change much; however, if you surrender your house or your car in the bankruptcy, your cosigner will still be responsible for any debt not covered by the collateral.
Example. Joe needed a loan to buy a car, so his brother Charles cosigned a loan with him. Joe's name was the only name on the car's title. Joe filed Chapter 7 bankruptcy and decided he could not afford the car, so he surrendered it. The car lender repossessed the car and sold it at auction for $8,000. At the time of the sale, the balance on the loan was $11,000. Charles, the loan cosigner, will be responsible for the $3,000 difference, but Joe will not, because his liability on the debt was discharged in his Chapter 7.