What Are the Implications of Bankruptcy on a Co-signer?

To What Degree Will a Loan Guarantor Be Liable for Debts in Bankruptcy

Implications of Bankruptcy It’s not uncommon, when you have less than perfect credit, or no credit history, to find a friend or family member who will co-sign on a debt. But what happens if your financial situation gets worse and you find it necessary to file for bankruptcy protection? How will the co-signatory be affected?

As a general rule, the bankruptcy typically won’t have any impact on the co-signer, or change the co-signer’s obligation to the creditor. The bankruptcy filing will only legally affect the rights and obligations of the debtor. The automatic stay, which protects the debtor (person filing the petition) will not prevent the creditor from contacting the co-signer.

Can You Protect the Co-signer in a Bankruptcy Filing?

Yes. There are a number of ways to protect a co-signer when you file for protection in bankruptcy. First, before you discharge any debts in bankruptcy, you can reaffirm whatever debts you choose. This essentially means that you choose not to discharge those debts and promise that you will pay them after the bankruptcy is final. You can also keep making payments on the debt, if possible, even after the bankruptcy is final.

Chapter 13 provides more protection to co-signers and guarantors, as the automatic stay extends to them under what is known as the “co-debtor stay.” While the stay will end when the Chapter 13 period expires, your co-signer will have protection for the three-to-five year term of the Chapter 13 reorganization.

A creditor may seek to have the stay lifted with respect to a co-signer under limited circumstances, including:

  • A determination that it was the co-signer who actually received the benefit of the debt
  • The creditor will suffer “irreparable harm” if the stay is not lifted

Contact Heath, TX Bankruptcy Attorney Carrie Weir

I offer a free initial consultation to all potential bankruptcy clients. Contact my office by e-mail or call me at 972-772-3083 for a private meeting. With offices in Rockwall, Texas, I represent clients in Heath, Greenville, Lavon, Wylie, Mesquite and Rowlett.

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