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FAQ'S

Monday, November 3rd, 2008

by Theodore Sliwinski, Esq.

Co-signers and Bankruptcy

1. How does a bankruptcy impact any co-signers?

When you are facing a financial hardship or overwhelming debt, then filing for bankruptcy may be the best option for you  get back in control of your finances and of your life. However, if you decide to file for bankruptcy, then you must carefully assess what impact a bankruptcy will have on any co-signors on your debt. It is critically important to determine whether your co-signer may ultimately be legally required to repay your debt if your file for bankruptcy. Obviously, whether a co-signer has to pay or not depends on the type of bankruptcy that you file for, and the specifics of your bankruptcy plan.

2. What is a co-signer?

A co-signer is a person who signs and guarantees that if you don’t pay for a debt then he will. A co-signer is essentially back up protection to any creditor that provides that their debt will be repaid if the original debtor fails to make payments. A co-signer signs for personal responsibility for debt along with the original debtor. A co-signer provides adequate assurance to  a creditor that the financial obligation will be repaid. A co-signer is the person who is the guarantor of the contract. If you don’t pay then the co-signer is obligated to pay. The principal borrower and the co-signer are both equally responsible for the debt they have signed for. Being a co-signer obligates you to pay another person’s debt that arises out of a contract or promissory note for a vehicle, mortgage, or student loan, if that person defaults and fails to do so.

3. How will a chapter 7 bankruptcy impact the obligations of any of a debtor’s co-signers?

In a chapter 7 case only the debtor is protected if the debt is dischargeable. However, the co-signer will still be liable to pay for the debt. In a chapter 7 case your creditors will still have the right to seek collection actions against the co-signer to pay the debt. If you are considering filing for a chapter 7 then it must be emphasized that the discharge will only extend to the person who files for bankruptcy and not to any co-signer. After the bankruptcy is over, any co-signers are still liable for any debts that were discharged.

4. How will a chapter 13 bankruptcy impact the obligations of any of a debtor’s co-signers?

If you file a chapter 13 case, then the co-signer is protected under most conditions, and he will not be pursued during the pendency of the chapter 13 case. As long as the chapter 13 case  repayment plan is being timely paid pursuant to the plan, and the case remains active, then the co-signer receives bankruptcy protection. However, when the chapter 13 plan is completed, then the  co-signer may be liable for any outstanding balance that was not fully paid for in the plan.