Filing for Chapter 13 bankruptcy can have consequences for your co-signer. In this post, we cover what these potential consequences are.
If you want personalized advice on how your bankruptcy can affect a cosigner, please call Stone Rose Law at (480) 739-2448 or use our contact form.
Some kinds of secured debts, like student loans, car loans, and sometimes mortgages, require extra security before the lender will agree to make the loan. This security sometimes is in the form of collateral, like a security interest in the vehicle that is the subject of a car loan or a mortgage lien on a house.
In other situations, the lender may require additional security from another person who agrees to remain legally bound to make the payments on the remaining balance of the loan if the debtor defaults. This person is a co-signer.
You, as the original borrower, are referred to as the debtor or the primary borrower.
Lenders often require a co-signer for first-time borrowers or first-time renters, especially if the primary borrower has any or all of:
The co-signer cannot be just anyone. Your lender will be looking for a person who has a reliable source of income, an acceptable credit record, and sufficient assets.
One of the considerations that affects both debtors and co-signers in a Chapter 13 bankruptcy is the automatic stay.
The most important distinction between Chapter 13 and Chapter 7 bankruptcy when it comes to the automatic stay is that the automatic stay in a Chapter 7 only protects you as the debtor and your property. It does not protect your co-signer from collection attempts.
This incentivizes many debtors who have cosigners to file for Chapter 13 bankruptcy instead of Chapter 7, because otherwise, creditors can pursue your co-signer for the debt after the Chapter 7 bankruptcy filing.
Chapter 13 bankruptcy provides automatic stay protection for a co-signer, protecting them from collection actions by creditors. This protection in Chapter 13 lasts until the bankruptcy case is closed or dismissed, unless the court lifts the stay for cause.
This protection is called the codebtor stay.
The codebtor stay applies to individuals. The debt cosigned for must be consumer debt and not business debt. A co-signer cannot be a business entity or someone who cosigns for a debt incurred as part of the debtor’s spouse’s business.
When the codebtor stay applies in your bankruptcy, under certain circumstances, a creditor can ask the court to lift the stay by filing a motion with the bankruptcy court. The creditor can ask the court to lift the codebtor stay if:
Although the codebtor stay will put a halt to creditor debt collection efforts during the course of a Chapter 13 bankruptcy, it is not a permanent solution for cosigners. One of two outcomes will result from a Chapter 13 bankruptcy filing: the bankruptcy court will discharge your debts, or it will dismiss your case.
If the bankruptcy court discharges your Chapter 13 bankruptcy after you complete your debt repayment plan, then you as the primary debtor will no longer be obligated to pay any remaining unsecured debts. But the codebtor stay is lifted, and if any balance remains on a co-signed loan, then creditors can pursue the cosigner to pay it.
If the court dismisses your case without you completing the Chapter 13 payment plan, then both the regular automatic stay for you and the codebtor stay will be lifted, and the creditor can seek payment from you, the cosigner, or both.
Filing for bankruptcy under Chapter 13 can be effective in giving you and your cosigner the breathing room needed to eliminate a cosigned debt through the debt repayment plan. If you can accomplish this, then your co-signer’s credit score should not be affected by your bankruptcy.
Chapter 13 may not always be available to you on a cosigned loan. For example, you may not be able to declare bankruptcy under Chapter 13 if you have too much total debt, or you do not have a source of steady income, or if your income is insufficient to make a debt repayment plan practical.
Stone Rose Law represents Arizona residents in many bankruptcy cases, including situations when you have a cosigner. If this is your situation, and you are concerned about its effect on you as well as your loan guarantor, then call our law office at (480) 739-2448 or use our contact form to speak with one of our bankruptcy law attorneys.
In a free consultation, we can review the facts of your case and help you evaluate your options.
