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.
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.
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.