Practicing as a bankruptcy attorney at Halcomb Singler, LLP, there are some questions I hear more often than others. One of those questions is how will bankruptcy affect my co-signer? This is a very good question, because often the co-signer is a relative or friend and the last thing my client wants to do is stick the co-signer with the debt or involve him or her in the bankruptcy.
But, before I address how a co-signer is affected by the filing of a bankruptcy petition, allow me to back up and explain my stance on co-signing. In my opinion, one of the most important financial rules to live by is don't co-sign any loan for anyone. Yes, this ban includes student loans and cars for your children. If you do decide to co-sign you should understand that you are just as liable for the debt as the person who took out the loan and you should be prepared to pay the loan should the other person fail to pay. Ok. Now that I have said that lets move on to bankruptcy's affect on co-signers.
How a co-signer is affected depends on the type of bankruptcy filed as well as the action taken in the bankruptcy. In a Chapter 7 bankruptcy, the debtor is typically protected by an "automatic stay." This is a protection afforded to those who file bankruptcy from their creditors. The automatic stay prevents creditors from attempting to collect from those who have filed bankruptcy. Unfortunately, in Chapter 7 the protection of the automatic stay does not protect a co-signer who has not filed bankruptcy . So, for example, if "Cindy" files for Chapter 7 bankruptcy and her mother has co-signed on the vehicle, the creditor cannot contact Cindy in an attempt to collect the debt (assuming the creditor has not received relief from the automatic stay), but the creditor can contact her mother regarding the debt. If Cindy decides that she cannot afford the car and surrenders it back to the bank during her bankruptcy and subsequently receives a discharge of her debts Cindy would no longer be liable on the debt. However, in this example Cindy's mother would still be liable for any amount owed to the bank after they sold the vehicle to a third party. However, if Cindy reaffirms on the vehicle, which basically means that she continues to be liable for the debt even after bankruptcy, and continues to make the payments on the car until it is paid in full her mom likely won't hear from the creditor during the bankruptcy because the creditor is continuing to receive payments just as Cindy never filed for bankruptcy.
One of the benefits of Chapter 13 bankruptcy is that co-signers are afforded some protection. If you file a Chapter 13 bankruptcy the stay that prevents your creditors from attempting to collect the debt from you is also afforded to your co-signer(s). This means that if Cindy took out a personal unsecured loan two years before filing for Chapter 13 bankruptcy that was co-signed by her mom that mom is protected by the stay. So long as Cindy's Chapter 13 remains in place Cindy's mom is protected in most circumstances. Even if a lawsuit has been filed against Cindy and her mom to collect on the loan, the lawsuit will be stayed as to both Cindy and her mom so long as Cindy files a Chapter 13. The stay against a co-debtor does not mean that the creditor could not petition the court for permission to collect against Cindy's mom. The bankruptcy code allows a creditor to request relief from the stay as to the co-signer if the co-signer actually received the money or property, if the Chapter 13 repayment plan proposes not to pay the creditor's claim or if the creditor's interest would be irreparably harmed by the continuation of the stay to the co-signer. However, this cannot happen without a hearing in front of the judge.
As you can see, it can be difficult to understand how the filing of your bankruptcy may affect your co-signer. If you are considering filing bankruptcy and live in the Indianapolis or surrounding areas please contact me if you are in need of assistance at 317-575-8222 or click here to explain how we can help. My firm will contact you to schedule an appointment and there is no fee for the initial consultation.
Halcomb Singler, LLP, is a debt relief agency. It helps people file for bankruptcy under the bankruptcy code. No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so. The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses.
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