People often file for Chapter 7 because the Chapter 7 process is quick—you'll receive the discharge order erasing your qualifying debts after about four months. However, your discharge won't eliminate someone else's responsibility to pay a debt. To find out what happens to your cosigner if you file for Chapter 7, you'll want to learn:
Getting a loan or a credit card isn't easy before establishing a lengthy credit history. Why? Because most creditors want a track record proving your ability to repay credit responsibly. Without it, the risk of losing money and "charging off" the account (writing it off the books as uncollectible) would be too significant.
Even so, it's still possible to buy things you need on credit if you can minimize the creditor's risk. That's where a cosigner comes in. Most creditors will lend you money or lease apartments, cars, and equipment if someone with an established credit history agrees to be responsible for your debt or "cosign" for it.
The person who assumes payment responsibility is called a "cosigner." If you're unable to pay the loan, the creditor can take steps to force the cosigner to pay in your place, even if you file for Chapter 7 bankruptcy.
Bankruptcy is predictable. After you file your paperwork, attend the 341 meeting of creditors, and complete your debtor education course, the court will issue an order "discharging" or wiping out your debts.
The order itself won't list your specific debts. Instead, the discharge order lists "nondischargeable debts" that don't go away in any bankruptcy case like student loans and most income taxes, child support, alimony, and criminal fines. The order also explains that you might be liable for debts you didn't list in your paperwork.
Once the court enters your discharge, your liability to pay dischargeable debts, such as credit card balances, medical bills, personal loans, and more, will be gone. But your cosigner's responsibility to pay for a debt owed on a contract entered into with you will remain.
Bankruptcy discharges your responsibility to pay debts only. Anyone else with an obligation to pay your debt—such as a cosigner, coborrower, or codebtor—will still have to pay it after your bankruptcy. However, if your cosigner filed bankruptcy, your cosigner could get out of it.
For instance, suppose you owed past-due rent after being evicted from your apartment. Even though your bankruptcy would wipe out the past-due rent, if Aunt Robyn cosigned the lease, she'd still be on the hook for the payment. If Aunt Robyn "the cosigner" filed bankruptcy, it would be a different story. She could wipe out her responsibility to pay the amount owed on your lease.
The same would apply if you owed money or a "deficiency judgment" after your lender repossessed your car and sold it at auction. Suppose your cousin Brookie cosigned the car loan. If you filed for bankruptcy, your cosigner on the car loan, Brookie, would remain responsible for paying the deficiency judgment.
You'll list people who have cosigned a loan with you, such as Aunt Robyn and Cousin Brookie, on the Schedule H: Your Codebtors form (we've included a form link below). The bankruptcy court will use the form's information to notify the codebtors of your bankruptcy case.
Sometimes you need to know whether a debt is secured or unsecured to understand a cosigner's liability after bankruptcy.
Most credit card debts, medical bills, and personal loans are unsecured debts. The contracts don't give the lender the right to take property if you don't pay the bill. What happens with unsecured debt after bankruptcy is straightforward—the cosigner will be responsible for paying it.
Most mortgages and car loans are secured debt because you agreed that the lender could take back the purchased property if you didn't pay as promised, creating a lien on the property. It's also common to pledge the purchased property as collateral when using credit to buy electronics, furniture, jewelry, and appliances.
If you continue paying for a house, car, or another property securing debt, your cosigner won't have to pay the bill after bankruptcy. But if you surrender the property or the lender takes it through foreclosure or repossession, the lender can collect any amount still owed from the cosigner.
Example. Tyler needed a loan to buy a car but his credit was shaky, so his brother Cameron cosigned with him. Eventually, Tyler filed Chapter 7 and surrendered the car because he couldn't afford it. The car lender sold it at auction for $8,000, leaving a balance of $3,000. Tyler won't be responsible because he discharged his liability in bankruptcy. However, the loan cosigner, Cameron, will remain liable for the $3,000 still owed.
Example. In this case, Tyler needed the car for work, so he entered into a reaffirmation agreement with the lender that allowed him to keep the vehicle on the same terms after bankruptcy. As long as Tyler continues paying the car loan, Cameron will not be liable for the debt.
Bankruptcy is an unusual area of law because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step.
The forms and resources below will help you find more information. Also, you can use this list of Chapter 7 and 13 bankruptcy forms to see where this topic falls. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.
More Bankruptcy Information
We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like How to File for Chapter 7 Bankruptcy by Attorney Cara O'Neill and Albin Renauer, J.D.
We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by consulting with a local bankruptcy lawyer.