What Happens to a Co-Signer in Bankruptcy?

Once you have made the difficult decision to get your financial future on track by filing for bankruptcy protection you may feel relieved. As soon as you remember that some of your debt has been co-signed by a friend or family member, however, that relief may dissipate as you wonder what happens to a co-signer in bankruptcy. The good news is that you do have options, though they vary greatly depending upon the type of bankruptcy you choose to file. You need to speak with a qualified Kentucky bankruptcy attorney to get advice specific to your situation but understanding the basics about co-signers and bankruptcy can be helpful.

Usually a co-signer is used when you want to purchase something on credit but do not have the level of income or credit required to secure the loan. Debts involving a co-signor are usually considered to be joint debts, meaning that a co-signer has the same level of responsibility to repay the debt as the primary borrower.

The type of bankruptcy you opt to use will impact the way your co-signer is affected. When you file Chapter 7 bankruptcy an automatic stay prevents your creditors from attempting to collect from you. The Chapter 7 automatic stay, however, does not apply to your co-signer. This means that your creditor is free to try to collect from your co-signer. You generally have two options if you want to protect your co-signer from collection efforts when you file Chapter 7 bankruptcy. One option is to reaffirm the debt prior to actually declaring bankruptcy. This means that you will not have this debt discharged in your bankruptcy and you will continue to be personally liable for the debt. Alternatively, you can continue to pay off the debt after your Chapter 7 discharge. Although you are no longer liable for debts that were discharged in your bankruptcy, you are not forbidden from repaying the debt post-discharge either.

Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy usually provides an automatic stay for both the primary borrower and the co-signer. This means that creditors may not pursue your co-signor for the debt once the stay is in effect. Because a chapter 13 bankruptcy requires you to repay most debts over an extended period of time, the debt for which your co-signor is liable will likely be paid off by the time your bankruptcy is discharged, thereby releasing the co-signor from any further liability for the debt. The automatic stay for the co-signer, called the Chapter 13 co-debtor stay, will no longer apply if the Chapter 13 bankruptcy is dismissed or converted to a Chapter 7 bankruptcy.

If you have decided that bankruptcy is your best option to a get on the road to a secure financial future but do not want your co-signer to be negatively impacted by your decision, contact an experienced Kentucky bankruptcy attorney to discuss your options.