What Happens to My Co-signer During Bankruptcy

What Happens to My Co-signer During Bankruptcy

A co-signer can be a lifesaver if you need to buy an apartment, get a loan, or other significant financial commitments. Because co-signers and guarantors are equally obligated to make payments, they could be in trouble if you file for bankruptcy. Read on to learn more.

What Does a Co-signer Do?

Banks, lenders, and renters are less likely to take an offer from someone with low credit, a history of debt, or no credit at all. Creditors and guarantors can offer a safety net for both the borrower and the lender.

Essentially, co-signers/guarantors are responsible for paying back debt if you are unable to. So, if you're late on rent, your co-signer is obligated to pay the past due amount on your behalf. A creditor usually has better credit, a higher income, or more assets to bring to the table, which helps the borrower become more legitimate.

A lender may ask for a co-signer/guarantor if you have:

  • Little to no credit history
  • Poor credit
  • Filed for bankruptcy
  • To borrow the money for a business

Lenders will also ask for a co-signer if you ask for more money than you can afford to pay. For new business owners, you will probably be asked about a co-signer to provide security and offer collateral if you can't do so on your own. In some cases, you can be the guarantor if you offer up your assets.

Keep in mind that while co-signers have an equal obligation to make payments, a guarantor is only responsible if you fail to meet the payment obligation. This distinction is vital because guarantors could be on the hook to pay the late balance in its entirety instead of making regular payments.

Chapter 7 Co-signers and Guarantors

In general, bankruptcy eliminates your obligation to pay off debt, but that does not mean that your co-signer is released from financial responsibility.

In Chapter 7, collection actions against you stop because of an automatic stay. However, the automatic stay does not apply to your co-signer. While you may not have to deal with collection agents anymore, your co-signer will. Bankruptcy doesn't have to leave your co-signer up a creek – you can take steps to protect them when you file.

  • Reaffirm the Debt: Before your debts are discharged in Chapter 7, you can reaffirm secured debts (loans, mortgages, etc.). When you reaffirm a debt, you forfeit the benefit of discharge and make yourself liable for payments again. While this method can protect your co-signer, it is not recommended unless you have a specific end goal in mind.
  • Pay Off the Debt: Once your Chapter 7 case is resolved, you're no longer obligated to pay discharged debts. However, you can still voluntarily pay off debt after bankruptcy. By making the payments on your own, you remove the pressure on your co-signer to pay on your behalf. They can still help out now and then, but they won't be held solely responsible for paying off the debt.

A word of caution about paying off debt: Some creditors may not agree to a new payment arrangement if you have a guarantor who is capable of paying the debt amount in full.

Chapter 13 Co-signers and Guarantors

When you file for Chapter 13 bankruptcy, the automatic stay protects you and your co-signer from creditors. Chapter 13 includes a codebtor stay that protects co-signers and guarantors from paying off consumer debt, but creditors can ask to lift the stay based on the following:

  • You aren't proposing to pay off the debt through your Chapter 13 repayment plan
  • Your co-signer/guarantor benefits the most from the creditor's claim
  • The creditor will suffer irreparable harm if the stay remains in place

Where Do I Start?

Financial matters like bankruptcy are incredibly complicated, so it's best to consult with an attorney before attempting to solve your problems or protect your creditor on your own.

Contact Buchalter & Pelphrey, Attorneys at Law, today.

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