Cosigners and Bankruptcy Obligations
If you have a cosigner on any of your debts, find out why you may want to consider Chapter 13 bankruptcy rather than Chapter 7.
A cosigner is someone who agrees to pay a debt if the borrower is unable to do so. Cosigners are often required if the person who wants to borrow money has poor credit or little credit history. For example, a parent might cosign a car loan or lease for an adult child who has had financial problems in the past. Typically, a cosigner (sometimes called a codebtor or guarantor) must have good credit and adequate resources to pay the loan.
Cosigners are fully liable for the debts they cosign, just like the primary borrower. If the borrower defaults, the creditor has a right to come after the cosigner for payment. And, if the borrower declares bankruptcy, the cosigner is still on the hook for the loan. Even after the borrower's debts are discharged -- and the borrower is no longer legally liable to repay the debt -- the cosigner remains obligated until the debt is repaid. If, however, the borrower pays off the debt as part of a Chapter 13 repayment plan, the cosigner will be protected.
The Automatic Stay
When someone files for bankruptcy, an automatic stay immediately comes into effect. The stay is a court order that prohibits creditors from proceeding or initiating any collection actions, such as phone calls, wage garnishments, or repossessions, while the bankruptcy case is in effect. The purpose of the stay is to make sure that the bankruptcy trustee -- and not the relative aggressiveness of the filer's creditors -- determines how the bankruptcy filer's assets (in Chapter 7) or income (in Chapter 13) is distributed among the creditors.
Cosigners in Chapter 7
The automatic stay won't help cosigners if the borrower files for Chapter 7 bankruptcy. Creditors can typically still pursue collection actions after cosigners, even if the original borrower is off limits. If the borrower's liability for the debt is discharged in Chapter 7 bankruptcy, he or she will no longer be liable to repay the debt. However, cosigners will still be on the hook for the full amount.
Cosigners in Chapter 13
With a few exceptions, the automatic stay in a Chapter 13 case protects cosigners as well as borrowers. As long as the borrower includes the loan in his or her Chapter 13 repayment plan and makes the required payments, cosigners will be protected from collection actions while the bankruptcy case proceeds. And, if the borrower repays the loan in full through the repayment plan, both borrower and cosigner will no longer liable for the loan when the bankruptcy case ends.
This protection for cosigners is one reason why some people choose Chapter 13 even if they are eligible to use Chapter 7. Particularly if the cosigner is a parent or other relative whom the borrower doesn't want to burden, filing for Chapter 13 bankruptcy can be a good option.
Getting Legal Help
Although getting protection for cosigners is a significant benefit of using Chapter 13, there are drawbacks as well -- chief among them, that you will have to devote all of your disposable income for the next three to five years to repaying your debt, rather than having them wiped out in a few months in Chapter 7 bankruptcy. If you have questions about which type of bankruptcy is best for you, or if you are a cosigner on a loan for which the primary borrower has declared bankruptcy, consider a consultation with an experienced bankruptcy lawyer.