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What Happens to the Cosigner in Bankruptcy?

Many times our clients as us, “What happens to a cosigner in bankruptcy?”  If more than one person “signs” on a debt, then the other person who “signs” with you is called a “co-signer” on the loan.  A cosigner is legally required to pay the entirety of the debt just the same as the primary signer.   When a bankruptcy is filed, a cosigner’s obligation to repay the debt remains the same.   However, the cosigner may still be protected in some ways by the bankruptcy filing.

Bankruptcy Does Not Erase a Cosigner’s Debt

When you file for bankruptcy, the obligation for the cosigner to repay the debt is not erased.   The cosigner is still fully responsible for the cosigned debt.   Although bankruptcy discharges the debt of the person who files, it does not discharge the debt of the cosigner who did not file.  If the cosigner wants the debt to be discharged for him or herself, the cosigner will also need to file bankruptcy.

The cosigner of a debt can sometimes negotiate, however, with the creditor in order to settle the debt after one party files bankruptcy.   Because one party is now “off-the-hook” on the loan, the chances for recovery on the loan may now be weaker.  If the cosigner does not want to file bankruptcy, a settlement may be possible.

Bankruptcy Can Offer Some Protection for a Cosigner

Although not much protection is offered to a cosigner during a Chapter 7 bankruptcy, Chapter 13 bankruptcy can have a much different affect on protecting cosigners.   In Chapter 13, a “Co-Debtor Stay” is put into effect by the filing of the case.  This means that if a cosigner is currently in a Chapter 13, then no collection efforts can be made against any cosigners.  This protection is offered because Chapter 13 allows the debtor the chance to pay (sometimes in entirety) the disputed debt through the Chapter 13 plan payments.  Therefore, it would not be fair to give the creditor the chance to collect on two parties at the same time.

The co-debtor stay in bankruptcy does not always protect the cosigner, however.  The Chapter 13 filer must substantially repay the creditor during the Chapter 13 plan for the co-debtor stay to be full-proof.  In addition, if the Chapter 13 plan does not pay back the creditor on the same terms, it may be possible for that same creditor to go back and collect the difference from the cosigner after the Chapter 13 case is completed.   Remember, cosigners have a separate, full obligation to repay the entirety of the debt back to the creditor.   Therefore, although Chapter 7 or Chapter 13 cases can assist in some degree the cosigner, they only very rarely fully release the obligations of the cosigner for repaying the debt.

What happens to the cosigner in bankruptcy?

What Are Priority Debts and Are they Dischargeable in Bankruptcy?

Priority debts are certain debts that take a “higher” priority than other debts during a bankruptcy.  These “priority” debts will be repaid first if any funds become available during bankruptcy.   In addition, most priority debts cannot be discharged through bankruptcy.

What types of debts are considered Priority Debts?

The most common sorts of priority debts are certain taxes and child support.  First, child support is always non-dischargeable during bankruptcy.   Child support is one of the most common forms of priority debt.   It is important to determine if a certain type of divorce-related debt is considered by family law and bankruptcy courts to be child support.  Certain debts such as martial settlement agreements and other payments may not be child support even if children are involved in the divorce.

Certain taxes are also a very common form of non-dischargeable debt.  Income tax debt that is less than 3 years old (going by the due date of the return) is a very common form of priority debt.   Therefore, if you have recent tax debt to IRS or your state revenue department, it will likely be non-dischargeable, priority debt during your bankruptcy.  Other forms of tax debt such as payroll taxes or sales tax is also priority debt.   Property taxes and other various forms of tax may likely not fall into priority status.

Other priority debts include criminal fines, criminal fines, injury caused by intoxicated driving, and overpayment of government benefits.  Some debts, including these, could be classified as “non-dischargeable” (which means they cannot be erased by bankruptcy), but they are not “priority” debts.   A good example of a non-dischargeable debt that is not a priority debt are student loan debts.  Student loan debts are non-dischargeable in bankruptcy but are usually only classified as normal, “unsecured” debts.

Priority Debts are Generally Non-Dischargeable in Bankruptcy

For the most part, priority debts cannot be discharged during bankruptcy. This simply means that you will still need to pay the debt after your Chapter 7 case.  If you file a Chapter 13 case, you will likely be required to pay the entirety of the priority debt through your Chapter 13 plan payments.   Priority debts treated differently during bankruptcy because of their “priority” status: they must at some point be paid.  This priority status protects them from being easily discharged by filing bankruptcy.

Parties Involved When Someone Files for Bankruptcy

The question comes frequently to our office – who is involved when someone files for bankruptcy?  In reality, less parties are usually involved than most people think.   Let’s discuss who is involved when someone files for bankruptcy.

The Debtor

The debtor is the primary person (or persons) involved when filing for bankruptcy. The debtor is the person or company who needs their debts relieved.   Usually the debtor files a bankruptcy petition asking the court for bankruptcy relief.  Debtors range from a single filer, to a married couple, all the way to the largest corporations in America.

The Case Trustee

The Case Trustee (or Interim Trustee) is the person in charge of your Chapter 7 or Chapter 13 case.  The trustee makes sure that your case is handled correctly, making sure that all bankruptcy rules are followed. The Trustee is also responsible for your property during the bankruptcy case, making sure that all property (or income) that should go to your creditors is properly turned over to repay your debts.

The Bankruptcy Court and Judge

You are always assigned a bankruptcy Judge during your bankruptcy case.  However, most cases never come up in front of the Judge because there are not disputes in most bankruptcy cases.   The Bankruptcy Court is the forum and mechanism in which you file your case.  The bankruptcy court’s clerk office is responsible for receiving your bankruptcy petition request and managing the basic administrative functions of your bankruptcy case.

The United States Trustee

The United States Trustee is the “sheriff in town” during the bankruptcy process. This party makes sure that all bankruptcy rules are being followed and that no bankruptcy fraud is occurring.  This office is also required to randomly “audit” a certain amount of bankruptcy cases each year just to make sure that the system is being properly followed through a “spot checks.”  Their direct involvement is not common on most bankruptcy cases.  The United States Trustee also takes a more active role in larger Chapter 7 and Chapter 11 bankruptcy business cases.

The Creditors

The other major party – perhaps the most important in some ways – are the creditors.  All creditors of the debtor are notified when a bankruptcy is filed. The creditors are allowed to make objections in very limited situations.  All creditors must file a proof of their claim if they want to be paid by any amounts collected during the bankruptcy process.  However, in most Chapter 7 cases, the creditors can do very little during the process.  In the majority of Chapter 7 cases, the creditors do very little except just receive their bankruptcy notice and then write-off or cancel their debt when they receive the Chapter 7 discharge notice.

Photo of judge with gavel, Parties in bankruptcy

Do Both Spouses Have to Attend Bankruptcy Meeting?

Due to either job requirements or sometimes health restrictions, we are frequently asked whether both spouses are required to attend the bankruptcy meeting. The answer we give is an unqualified, “yes,” both spouses must attend the bankruptcy meeting. The reason why both spouses must attend can be found in Section 341 of the bankruptcy code.

Section 341 of the Bankruptcy Code requires an “Oral” Examination at a Creditor’s Meeting

Because Section 341 of the bankruptcy code requires an “oral” examination of the debtor at a “creditor’s meeting,” both spouses must attend this bankruptcy meeting of creditors. Because it needs to be oral and at a place where the creditors can attend, the meeting must occur in-person with both debtors present. Although creditors rarely attend basic Chapter 7 bankruptcy meetings, the opportunity to attend these meetings must take place on every case. If both debtors are not physically present, then they cannot be examined by the trustee or the creditors.

The bankruptcy system has developed the bankruptcy meeting from these requirements to be a single-set “hearing-like” setting. Just as any other court hearing, you are required to attend in person. Both debtors’ identities must also be clearly established to prevent bankruptcy fraud by bringing their driver’s license and social security card in person. Telephonic or other not-in-person approaches are not allowed or at least very much opposed by the bankruptcy system because this further frustrates attempts to prove identity.

Are There Any Exceptions? What About Power-Of-Attorney?

The bankruptcy system makes few exceptions to in-person examination during the bankruptcy meeting. Even power-of-attorney is usually insufficient for someone else or a spouse to testify without the debtor in person. If at all possible, the debtor needs to attend: work requirements or other practical-type considerations are usually insufficient excuses. If the debtor faces complete physical disability or mental incapacity, then accommodations are sometimes made to make the bankruptcy system work for these rare situations. In almost every other situation, both debtors need to attend the bankruptcy meeting in person in order to meet the requirements of the bankruptcy code.

Behind on Car Payments: What You Can Do About It

If you are behind on car payments, you are not alone.  America is now reaching record levels of consumers behind on car payments.   What should you do if you find yourself behind on car payments?   This article discusses why consumers are behind on car payments and what you can do about it.

Automobile Lending is Based on Profit, Not People

Automobile lenders as a whole use various forms of statistics to determine how many U.S. car loans should be generated each year.  These statistics are based upon maximum profit projections. These automobile loans do not have the consumer’s best interests at heart.   Instead, the focus is on profit.    Therefore, thousands of automobile loans are generated each year that may spell economic doom for the purchaser.   If the purchaser defaults after thousands of dollars in payments (going mostly to interest payments), it’s of no concern to the lender.  The lender will repossess the automobile, sell it, and then slap a massive deficiency judgment on the purchaser.

Therefore, whenever you seek to purchase an automobile on credit, you need to be fully aware of the dangers.  The automobile sellers and lender are seeking a profit at your expense.  You need to always start at this point of understanding: it’s all about auto-sellers profit at your expense.

Behind on Car Payments: What Are My Options?

Multiple options are available when you are behind on car payments.  First, you usually have 2-3 months before the lender repossesses the vehicle.  During this time, you can usually cure the deficiency without much trouble from the lender.   Some lenders also give “grace” periods or even a limited amount of “deferments” for a monthly payment.   Some buy-here-pay-here lenders are more strict however: they will not give any payment “graces” and sometimes repossess after 30 days of being late or less.

Secondly, you may be able to settle your obligations to your automobile lender, at least eventually.  If your automobile is behind in payments, it will eventually be repossessed and then sold a short time later.  From that point, you will be responsible legally to pay any “deficiency” after the sale. These deficiency amounts vary based on the circumstances, but can sometimes be even in excess frequently of $10,000.   The automobile lender may take much less than your “deficiency” amount in settlement just to get the loan “off their books.”

Third, you can file either Chapter 7 or Chapter 13 bankruptcy when you are behind on automobile payments.   Chapter 7 mainly only erases your debts.   In Chapter 7, generally you would be forced to make payment arrangements and keep paying on the vehicle if you desire to keep it.

Chapter 13, however, has much more powerful options in dealing with a behind-on-car-payments situation.   Chapter 13 can “reorganize your debt” and you can pay the automobile through the Chapter 13 plan at low interest.  Sometimes the automobile payments can also be much lowered in Chapter 13.   Chapter 13 also can even force your automobile lender to return a repossessed automobile if it was only recently repossessed and has not yet been sold.

The “Best” Thing You Can Do About Being Behind on Automobile Payments

By far, the best thing you can do to prevent being behind on automobile payments is simple: never buy financed cars.   Completely avoid the auto-lending market by saving to purchase paid-in-full automobiles.  Take advantage of various learning opportunities to learn how to purchase and maintain an automobile more affordably.   Buy multiple affordable vehicles: then you’ll never be forced to make a poor “quick” purchase.  If you are always “under the gun” to purchase an automobile, you will always come away with a horrible deal.   Make the wise purchasing of automobiles one of your top financial goals.

Indianapolis Bankruptcy Attorney John Bymaster explains your options if you are behind on car payments