At some point in our lives, we usually need somebody to co-sign on a loan with us. In 2003 I returned home from a two year mission with my church in India. When I got home, I had no car, no job, and no credit. After a few months of looking I finally found a job- but I had no way to get there. Fortunately, my mom agreed to co-sign on a vehicle loan with me. This not only helped me find a reliable source of transportation- but also helped me to successfully build my credit.
A cosigner (sometimes referred as a ‘co-debtor’ in bankruptcy) is usually a friend or family member who agrees to be responsible for another person’s debt, which involves a legal obligation made by the cosigner to make payment on the other person’s debt should that person default.
Whether you are the cosigner of the debt, or a debtor intending to file for bankruptcy protection, know that a bankruptcy filing ultimately affects both of you. In a Chapter 7 case, eligible debts are discharged and the debtor is protected from creditors by the bankruptcy filing. Unfortunately, the cosigner is not protected by the debtor’s bankruptcy filing. The creditor can still contact, make demands, and even file suit against the co-signer. It is important to let family members know how this will impact them.
Cases filed under Chapter 13 also provides protection for cosigners of consumer debts. As you may know, when you file bankruptcy, the Bankruptcy Court enters an Order of Relief forbidding creditors to continue to collect or even contact the debtor. When filed under Chapter 13, this stay protects the debtor and the cosigner. While the automatic stay is in place, creditors will be prohibited from trying to collect on the co-signed debt from either party. The only catch is that the debtor must propose terms to pay back the creditor as a part of their Chapter 13 Plan, or the creditor can ask the Bankruptcy Court to allow them to start collecting from the co-signer.
If you are thinking about bankruptcy and the impact it will have on your family members, it is important to talk to an experienced bankruptcy attorney to assess your options. Chapter 13 may be a way for you to get the relief you are seeking, and also protect your family members from the effects of your bankruptcy.