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bankruptcy co-signerMany people who file for bankruptcy often have questions about how filing bankruptcy may affect co-signers on accounts or loans that they plan to list on their bankruptcy petition. In all bankruptcy cases, all debts of the debtors must be listed, whether you want the debt listed or not.  This is not a choice, even if you want to continue to make payments on the debt. This often comes up with car loans or other debt that is secured by property.  The good news for secured debts is that you may choose to reaffirm the debt or continue to make payments on the debt to retain the asset after the bankruptcy case is filed.  With unsecured debts, you may find that these accounts may be closed after filing bankruptcy, although is more likely that the co-signer on the debt will still be liable for repayment.

When a debtor files for chapter 7 bankruptcy and receives a bankruptcy discharge, eliminating their liability for the debt, any co-signer on an account will continue to be responsible for the remainder of the debt on the account. This is because debt collectors and credit card companies can no longer collect against a debtor who has filed for bankruptcy and received a a discharge of their debts in their case.  If you have a co-signer on a debt that you think will be discharged in your bankruptcy, you should give that person on notice so that they can make arrangements to pay on that debt so that their credit will not be affected should the account go delinquent.  This is also a good idea if this person wishes to retain a car that they should be making payments on.

On the other hand, if a chapter 13 bankruptcy is filed, a co-signer will be protected by the bankruptcy automatic stay as long as the chapter 13 repayment plan is active. If a debtor fails to make their required chapter 13 monthly payments, then the co-signor will once again be liable for any joint debt along with the bankruptcy filer should the case be dismissed.  If the chapter 13 bankruptcy filer receives a discharge of their debt at the end of their chapter 13 bankruptcy plan and there is debt remaining on the co-signed debt, then the co-signer would be liable for paying the remaining balance and their credit could be affected if the remaining balance is not paid off.  It is best to advise any co-signer of potential debts out their that the co-signer may be liable for so that they can make proper arrangements.

In cases in which a bankruptcy filer is married and files bankruptcy as an individual, the non filing spouse who may have co-signed on a debt may also get the benefit of the debtors discharge as the marital debt acquired during the marriage would be discharged as to the marital community.  With that said, if there was debt acquired during the marriage and the debtor and co-signer are no longer married, the co-signer may still be liable for the separate debts post bankruptcy discharge.  Additionally, if the debtor receives a bankruptcy discharge but was supposed to repay the debts as part of a divorce decree, the debtor will still get a discharge of the debts, but if there is a co-signer ex spouse who is still liable for the debts, they may be able to enforce their rights in family court against a co-signer debtor in the family court.

It should be noted that while marital debts may not be dischargeable in chapter 7 bankruptcy, some marital debts may be dischargeable in chapter 13 bankruptcy if the debt is not considered child support or for the support of the ex-spouse.  Therefore, in some cases where a debtor has a lot of co-signed marital debt but is responsible for repaying the debt per a divorce decree, they may want to consider filing a chapter 13 bankruptcy instead of a chapter 7 bankruptcy, even if they may have to pay a little bit of their debt back to creditors.  Not all chapter 13 bankruptcy plan involve a plan that repays all debts.  In chapter 13 a debtor only needs to repay their available disposable income or pay what a chapter 7 trustee would have received from assets worth more than a debtor is allowed to keep through their available bankruptcy exemptions.

With regards to student loans that have been co-signed for, these loans will likely not be discharged in your bankruptcy case but there are options to remove a co-signed loan, such as refinancing the student loan or in some cases your lender may have various requirements that are necessary to remove a co-signer from a student loan.

If you have additional questions about how having a co-signer may affect your bankruptcy case, schedule a free bankruptcy consultation or give Symmes Law Group a call at 206-682-7975 to speak to a bankruptcy attorney who can best advise you.

  • Richard Symmes

    Hi, Richard here

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