In some situations, you may have needed a cosigner to secure a loan or credit card. This is because there wasn’t enough data to support giving you the loan or credit on your own or because you were rebuilding credit after having had past issues. The purpose of the cosigner is to assure the lender that the debt will be made good. Often the cosigner is a close friend or family member which can make the topic of bankruptcy an especially sticky one. Whether or not your cosigner is protected under bankruptcy varies with the circumstances and type of bankruptcy you are filing for.
If you are filing under Chapter 7, the terms of the debt agreement you and your cosigner signed come into play and the creditor may be able to proceed against the cosigner. However, the cosigner is protected if you file under Chapter 13 Debt Adjustment providing the following criteria are met:
- It must be consumer debt
- The debt may not be the result of doing ordinary business
- No benefit from the debt can pass to the cosigner
As long as you make the scheduled payments under the repayment plan, the creditor cannot attempt collection from the cosigner. Chapter 13 allows you to still pay off your own debts and protects your cosigner. However, if you miss your payments, the creditor may be able to attempt collection from your cosigner
The reason why the cosingers are protected in Chapter 13 is that the automatic stay – the court order issued when the case is filed telling creditors to leave you alone – extends to codebtors in Chapter 13. The automatic stay remains in effect during the payment plan, which usually would be five years. Few Chapter 13 plans involve paying off all the debt. Most of them pay only a small portion, after which the Debtor receives a discharge for whatever is unpaid. The cosigner, however, does not receive a discharge unless he or she filed his or her own bankruptcy. So after the payment plan is over, the creditor may once again pursue the cosigner.
If you are unable to maintain your payments under your Chapter 13 schedule, you can still apply for bankruptcy protection under Chapter 7. This will, however, make your cosigner immediately susceptible to collection attempts from your creditor.
Naturally, it is important to choose the right option when you consider bankruptcy, particularly if a cosigner is involved. Consult with a qualified bankruptcy attorney before you file for bankruptcy and possibly put your cosigner at risk too.