If you have a co-signor or guarantor on any of your debts, your decision to file for bankruptcy will have an impact on them. But, there are ways to prevent creditors from pursuing your co-debtor.
Co-signing a loan links you and your co-signor together for the life of the debt. So, if you get in financial trouble, your troubles are also your co-signers troubles. A standard Chapter 7 bankruptcy discharge will eliminate your debt, but it doesn’t eliminate your co-signors obligation on that debt.
So, in Chapter 7, Bankruptcy, while the automatic stay protects you until your discharge. The automatic stay prohibits most creditors from continuing with collection activities. There are some exceptions to the automatic stay, so be sure to talk with me about them before you file. Also, keep in mind that creditors can ask the bankruptcy court to remove the stay in certain situations. BUT, the automatic stay does not extend to your co-signer in a Chapter 7 bankruptcy. They remain exposed to the collection actions of the creditor.
Chapter 13 Bankruptcy Can Protect Your Co-Signor.
A Chapter 13 bankruptcy is a different animal than the more common Chapter 7 bankruptcy. It provides special protection for co-signed debts; it extends the automatic stay to co-signors!
There are some qualifications:
To qualify for this protection, the debt in question must be for a personal or household purpose. For example, a co-signed car loan would be covered, but a co-signed business lease would not.
The benefits of the loan must have flowed to the person who filed for bankruptcy. If you co-signed a loan made to a friend, your friend isn’t protected by your Chapter 13 stay. (But you can still discharge your obligation under that loan).
Notably, to keep the automatic stay in place, the Chapter 13 plan must provide for payment in full of the debt.
Usually, Chapter 13 plans are required to treat all unsecured, non-priority debts the same, meaning each of the unsecured debts gets the same percentage payment through the plan. But co-signed debts are excepted. So, you can treat a co-signed debt differently than the other debts and pay it in full, even if other debts get little or nothing in Chapter 13.
So in your Chapter 13 bankruptcy plan, you can pay 100% of the debt on the co-signed debt (with no interest) and nothing or far less to all the other creditors. There is a catch: after your Chapter 13 case is over and after you have completed your Chapter 13plan payments, the co-signor may remain liable for interest that may have accumulated on the co-signed debt over the life of the plan. So, while at the end of your Chapter 13 plan the principal amount owed on the co-signed debt (and any accrued interest when the case was filed) will have been paid, the accrual of interest on the co-signed debt during the term of your plan will continue, and your co-signor will remain liable for that interest. And that is what happens to your co-signer when you file bankruptcy.