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How Are Cosigners Treated In A Bankruptcy Case?

Bankruptcy is an unique scenario, where most of your debts get forgiven, and you become debt free with new hopes for a better financial future.

But, it might not be that easy if you own debts with someone else as a cosigner! The situation can backfire, and the cosigner may land into big troubles with one party filing bankruptcy.
There will be instances, where the debt payment liability is getting shifted completely over to the cosigner.
And if things go well with a correct bankruptcy filing, then all the cosigners will get a spread out payment plan for the defaulted debts.
Hence, if you are a cosigner, or you have debts with a cosigner, then before you file bankruptcy, there are a few debt elimination options, which you should be knowing first and foremost, to avoid any further complications.

For co-signed debts, Chapter 13 bankruptcy filing is the best:

Chapter 13 bankruptcy offers the co-debtor or co-signer protection. As soon as you file it, an automatic stay will get imposed on both you and your co-signer.
This will bar all the creditors or lenders from initiating any type of collection efforts for the defaulted debts, falling under the bankruptcy case.

Now, what is Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy is mostly interested in arranging the debt account’s terms and conditions legally, and therefore assists in paying off the debts over a spread-out payment schedule.
Chapter 13 bankruptcy, does not aim for debt forgiveness. Rather, it takes control over your whole debt portfolio, and gives you a final chance to pay off your debts. The Chapter 13 will also ensure that no creditors or lenders can make efforts to collect the debts from you, while the case is in progress.

How it helps the co-signers?

They will get the same protection from creditors or lenders, as the filer in Chapter 13 bankruptcy. Now, since Chapter 13 will be focusing on debt reorganizing or restructuring, both the filer and cosigner, will have to adhere to the new payment plan designed by the Bankruptcy Court.
If both again fail to make the debt payments, then the case can get transferred to a Chapter 7 Bankruptcy case, and the cosigner will lose the automatic stay protection or other benefits, that are offered by Chapter 13!

Chapter 7 Bankruptcy has no room for co-signers:

This bankruptcy filing is very different when compared to Chapter 13 case.
Here the co-signers will be getting no protection, and it won’t be wrong to say, that Chapter 7 in reality has no effect on the cosigner at all.
This bankruptcy chapter will discharge all or most of your debts, and is a very drastic debt elimination process, that liquidates your assets and possessions.
Therefore, once you file this, automatic stay will be in full effect on you, but the same won’t be for the co-signer. He/She will still be liable to pay off the debt from his/her end.
The Chapter 7 case proceedings will only revolve around the filer, excluding any benefits for the co-signer.
Hence, you can be unfortunately assured, that the creditors or lenders have the total authority to go behind your co-signer(s), even after your liability for the debt gets discharged under Chapter 7 bankruptcy.

You should also know, what makes someone or you a Cosigner:

There are many instances where a person might require a co-signer while applying for a loan. The reasons can be anything from offering financial aid, if the borrower defaults on payments, to helping the borrower get the loan approved on a poor credit portfolio.
Whatever is the case, if someone cosigns a debt, he/she is liable to pay back the loan, in any case where the borrower fails to make the debt payments.
Co-signing is definitely beneficial in getting approvals for good loan terms, but the responsibilities are huge for the co-signers.
Under no circumstances can a co-signer decide to step back on a defaulted loan. As discussed above, even a forceful Chapter 7 bankruptcy discharge will not come helpful to the co-signer.
Therefore, before you co-sign a loan, make sure you know all the consequences you have to face, if the other person stops making the debt payments.
Pay attention to all the loopholes of co-signing a debt, and make sure you sit down with a bankruptcy lawyer to discuss the effects that bankruptcy has on the co-signers, in absolute transparency.

About the Author

Anthony W. Chauncey is highly qualified and dedicated in the areas of Bankruptcy, Foreclosure Defense, Criminal Defense, Traffic Citations, Family Law, and Personal Injury who can help you in your time of need.