What happens to the co-signer in Bankruptcy?
Written on January 19th 2011
If your car loan or other installment loan has a co-signer, like your mother or father, what happens to them if you file bankruptcy? The short answer is: it depends.
If you file a chapter 13 bankruptcy, then both the debtor and co-debtor will enjoy the protection of the automatic stay. The automatic stay gives the debtor a breathing spell from his creditors, stopping all collection efforts, all harassment, and all foreclosure actions. It allows the debtor the opportunity to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy, like constant phones calls from creditors, the threat of lawsuits or the collection of judgments. So in a chapter 13, the co-debtor gets that same benefit as long as the debtor will be paying the co-signed debt in full in the chapter 13.
What happens if the debtor’s chapter 13 plan doesn’t provide a full payment to the debt or the creditor will suffer “irreparable harm” if it’s not allow to collect from the co-debtor? Then the automatic stay will be released as to the co-signer. If the goal of the debtor is to protect the co-signer from collection then the chapter 13 is the way to go with full payment going to the creditor.
The automatic stay is not afforded to the co-signer in a chapter 7. In a chapter 7, the creditor has nothing to prevent it from pursuing the co-debtor. This also applies to the co-signer of a chapter 13 debtor who later converts his case to a chapter 7.
We all want to help our kids or family members when they are in need. Words well heeded are of none other than of Benjamin Franklin, “Neither a lender nor borrower be.” If you co-sign a debt or ask someone to co-sign a debt for you, then remember that a co-signer is equally liable for the debt and his ultimate protection from a creditor is the debtor, and how the debtor handles his financial situation.
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