Bankruptcy And Cosigners Joint Debts
Declaring bankruptcy erases certain debts, so you don’t have to repay them. However, if someone else, like a cosigner or joint account holder, co-signed or is responsible for the debt with you, they still have to pay it not to be considered in default. Here’s what happens:
- If you file for Chapter 7 bankruptcy, the creditor can still collect from the cosigner.
- If you file for Chapter 13 bankruptcy, the creditor must pause their collection actions to comply with the Co-Debtor Stay.
- You can protect the cosigner by paying off the debt alone.
What Is A Cosigner?
A cosigner is a person who agrees to take responsibility for repaying a loan if the primary borrower is unable to do so. Lenders may ask for a cosigner when the primary borrower has a limited or poor credit history or low income. Having a cosigner improves the chances of the loan being approved because the cosigner is considered creditworthy and can be pursued by the lender if the principal borrower defaults on monthly payments.
Cosigners and guarantors are similar but have some differences. Creditors can try to collect from both cosigners and primary borrowers at the same time if there’s a loan default. However, with guarantors, creditors must first attempt to collect from the primary borrower before going after the guarantor. In the case of bankruptcy, both cosigners and guarantors are treated the same way, as they both become personally liable for the debt.
Will Bankruptcy Affect Joint Accounts?
Cosigners and guarantors are similar but have some differences. Creditors can try to collect from both cosigners and primary borrowers at the same time if there’s a loan default. However, with guarantors, creditors must first attempt to collect from the primary borrower before going after the guarantor. In the case of bankruptcy, both cosigners and guarantors are treated the same way, as they both become personally liable for the debt.
Will Bankruptcy Affect Joint Accounts?
Under Chapter 7 bankruptcy, the automatic stay, the legal protection that prevents creditors from pursuing collection actions against the debtor, does not extend to cosigners and guarantors.
When the debtor files for Chapter 7 bankruptcy, creditors can pursue collection action against the cosigner or guarantor for repayment as if the debtor had defaulted on the loan. This means the cosigner or guarantor may be held responsible for the debt and may face collection actions from the creditors. Cosigners and guarantors must know this risk when agreeing to cosign or guarantee a loan for someone else. The debtor filing for bankruptcy should notify the cosigner or guarantor of the bankruptcy at the time of bankruptcy filing.
Safeguarding Cosigners and Joint Account Holders Post Chapter 7 Bankruptcy
If you want to keep certain assets, like a car, you can agree to remain responsible for the debt by signing a reaffirmation agreement with the lender while you are in bankruptcy. But think carefully because you won’t benefit from the loan payments after the bankruptcy discharge.
Even after bankruptcy, you can choose to keep paying your debts voluntarily. By doing so, you can ensure your cosigners and joint account holders pay debts and won’t face negative consequences.
The Impact of Bankruptcy Chapter 13 on Cosigners and Guarantors
Chapter 13 bankruptcy protects your cosigners and guarantors, giving you more time to repay the debt you owe jointly. During Chapter 13, the automatic stay prevents creditors from collecting on consumer debts, safeguarding personal loans to your cosigners and guarantors (called the Chapter 13 codebtor stay).
However, creditors can ask the court to lift the automatic stay under certain conditions:
- If your cosigner or guarantor benefited from the creditor’s claim.
- If you are not planning to pay the debt in full through your Chapter 13 repayment plan.
- The creditor will suffer significant financial harm if the stay remains in place.
Protecting Cosigners and Joint Account Holders After Chapter 13 Bankruptcy
Chapter 13 bankruptcy differs from Chapter 7 because it can safeguard cosigners and joint account holders if you fully repay the debt in your Chapter 13 repayment plan. When you file for Chapter 13, a codebtor stay protects cosigners and joint account holders from creditors trying to collect on consumer debts.
However, creditors can request the court’s permission to lift the stay under specific circumstances:
- If the cosigner or joint account holder benefited the most from the loan, such as driving the purchased car.
- If your Chapter 13 plan needs to pay the cosigned debt fully.
- If the creditor would suffer severe harm if the codebtor stay continues.
Your cosigner will likely be protected if you plan to pay off the debt, like a car loan. But if some debts get paid less than usual in Chapter 13, creditors might object to your plan if it prioritizes paying the cosigned debt more and other obligations less.
Additionally, the codebtor stay ends if the court dismisses your case or converts it from Chapter 13 to Chapter 7 for bankruptcy protection.
Whether you are considering Chapter 7 or Chapter 13 bankruptcy, seeking professional legal counsel can help you navigate bankruptcy more effectively and protect your interests. Find a bankruptcy attorney right here.
Car Loan Options and Their Impact on Primary Borrower And Cosigners
If the debt you owe is typically paid back in full through your bankruptcy plan, like a car loan with only a few payments left, your cosigner would probably be protected.
This is because all creditors would still receive the same amount they were supposed to get, ensuring your cosigner loan account is safe from additional liability.
When you have a co-signer for your car loan and file for bankruptcy, there are three options you can choose to file bankruptcy:
Keep the Car and Reaffirm the Loan
If you reaffirm the car loan, you’ll still be responsible for the debt even after bankruptcy. If you miss payments, both you and your co-signer can be pursued for the remaining balance of the auto loan even after the car is repossessed
Keep the Car and Redeem it with a New Loan
Redeeming the car means paying the current value to the lender for a clear title. Your co-signer remains responsible for the car loans remaining loan balance, and if you stop paying, their credit may be affected.
Surrender the Car and Discharge the Debt
If you surrender the car in a bankruptcy filing, your obligation to pay the loan is discharged. However, your co-signer will still need to pay off the car loan, and they can keep the car if they continue making payments, regardless of who possesses the vehicle during the bankruptcy case.
