How will bankruptcy affect a cosigner?

Cosigners, also called co-debtors, generally don’t fair all that well in bankruptcy. That’s because the entire purpose of co-signing was to convince the lender or vendor to extend credit by offering up another person who could make payments if the debtor does not.

Only one form of bankruptcy, Chapter 13, offers any form of protection to cosigners. Other types of bankruptcy, including the very common Chapter 7, do not—the “main” debtor may be discharged from the debt, but the cosigner is still expected to pay.

Chapter 13 only offers limited protection. Under it, the cosigner can get what’s known as a “cosigner stay” (or “co-debtor stay”). While the plan is in force and being adhered to by the person who declared bankruptcy, the creditor cannot look to the cosigner for payment. There are a number of limitations on it, however, such as:

• It can’t be business debt, only consumer debt.

• The plan must intend to pay the creditor in full over the 3 – 5 year period.

• The cosigner can’t be the one who received the benefit of the loan.

If these conditions are not met, or if they are, but the debtor does not honor the plan, then the creditor can look to collect from the cosigner.

You don’t mention what kind of a debt it was, so we can’t provide any sort of definitive answer. You and your daughter should consult with a bankruptcy attorney, to see what the best option(s) for you may be.