If you’ve had limited income or credit history, then you may have had someone cosign on a loan for you. This could’ve been for a car loan, a private student loan or some other type of personal loan. That cosigner, regardless of their relationship to you, becomes financially responsible for the debt if you’re unable to make good on your debt obligation. That can become problematic, then, when you’re at the point of considering personal bankruptcy. But how does a bankruptcy filing affect your cosigner? Let’s take a closer look so that you have a better understanding of which bankruptcy option may be right for you and your cosigner.
How a Chapter 7 bankruptcy affects cosigners
A Chapter 7 bankruptcy, known as a liquidation bankruptcy, requires you to sell many of your assets to satisfy creditors as much as possible. But with this type of bankruptcy, cosigners on your loans won’t be protected. In other words, even though you receive protection from the bankruptcy process and can discharge your obligations to satisfy that debt, your cosigners won’t. This essentially leaves a cosigner on the hook for the entire debt. This could cause significant financial strain for them and, depending on the circumstances, it could devastate your relationship with them.
There are ways to protect a cosigner in a Chapter 7 bankruptcy, though. This includes voluntarily making payments on the debt even after you’ve discharged your obligation and reaffirming the debt so that you continue to be liable for the debt obligation even after bankruptcy. Just keep in mind that if you reaffirm the debt but can’t keep up with it, your cosigner will still be responsible for it. This makes debt reaffirmation a less appealing option. But there may be another effective option that’s better suited to your situation: a Chapter 13 bankruptcy.
How cosigners are handled in Chapter 13 bankruptcy cases
A Chapter 13 bankruptcy petition can offer what’s known as a co-debtor stay. Here, creditors are prohibited from pursuing debt collection from cosigners while your bankruptcy case is pending. Since Chapter 13 bankruptcies seek to satisfy debt obligations by reorganizing them and setting up a payment plan, the hope is that you can make good on your debt, or at least significant portion of it, without the need for collection from the cosigner.
It’s important to note that there are some caveats here. For example, the Chapter 13 co-debtor stay only applies to individual consumer debts. In other words, if you have a cosigner on business loans, the stay won’t apply. The stay is also only applicable to individual cosigners. Businesses that have cosigned on your loans are ineligible. As mentioned above, the stay is only good for as long as your case is active and in good standing. So, if you slip up, the stay may come to an end, putting your cosigner at risk.
Which bankruptcy option is right for you?
Only you can answer that question. But before you do, you have to ensure you’re fully informed on the nuances of your personal bankruptcy options. Only then can you rest assured that you’ve done everything you can to protect your interests and your future. That’s why now is the time to educate yourself as much as possible and discuss your circumstances with your bankruptcy attorney. Hopefully then you can navigate the process with confidence by making the decisions that are right for you. You can get a good start by reading through our blog and the rest of our website.