In Chapter 13 Bankruptcy: Co-Signer Liability

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The U.S. Bankruptcy Courts may provide a co-signer in bankruptcy some protection when the primary debtor (the person you co-signed for) files for personal bankruptcy. For instance, chapter 7 is when a person wants their debts eliminated. This means that they want the U.S. Bankruptcy Court to wipe out their unsecured debts so they owe creditors nothing. Unfortunately, for you as a co-signer, you’re given not protection and creditors come after you for the debts you co-signed for. Chapter 13, however, provides a co-signer some protection.

The Co-Signer Receives An Automatic Stay

There is no co-signer bankruptcy. In other words, you don’t have to file for bankruptcy along with the primary debtor. Instead, once the person files chapter 13 bankruptcy the U.S. Bankruptcy Courts provides an automatic stay. The stay stops creditors from contacting, initiating or continuing debt collection activities such as sending demand letters, suing or garnishing wages. The automatic stay also extends to the co-signer. Thus, while the primary debtor is making their required bankruptcy payments the creditors can’t attempt to collect the debt from the co-signer.

Beware That A Creditor Can Try To Lift The Automatic Stay

A creditor can petition the U.S. Bankruptcy Courts to lift, or remove, the stay based on a couple of factors regarding the co-signer. For instance, the creditor may contend that you (as the co-signer) received some benefit from the primary debtor acquiring the property. This means that you should be protected in the bankruptcy because you enjoyed spending the money or living in the home.

Whether The Co-signer is Ultimately Responsible For Paying The Debt Depends On The Amount Paid

There are two options for the primary debtor when paying creditors in bankruptcy. The option they choose will affect you as the co-signer. If the debtor pays the debt in full then you are not responsible for the debt because they are discharged. However, the primary debtor is only responsible for paying a portion of the debt in chapter 13 the creditor will pursue you for the remaining balance.

A Co-signer Guarantees The Debt Will Be Paid

As a co-signer you’ve pledged to guarantee to pay the debts if your relative, friend or business partner doesn’t.

Seek Legal Assistance

Contact a lawyer if you’ve co-signed for property or a loan and the primary debtor files for bankruptcy. Your lawyer will look out for your interest in their bankruptcy.