Bankruptcy and Co-signers
Before filing for consumer bankruptcy protection a debtor should consider the type of debt that will be affected. If any debt is secured by a co-signer, filing for bankruptcy could place the co-signer in the position of being compelled to cover the debt.
Regardless of whether a debtor is seeking a Chapter 7 discharge or Chapter 13 reorganization bankruptcy, an automatic stay goes into effect as soon as the petition is filed with the Court. The stay of proceedings in a Chapter 7 bankruptcy, however, only protects the debtor, not a co-signer. As a result, creditors affected by the stay may immediately attempt to collect the debt from any co-signers. A debtor should always check with the creditor and review any contractual documents before filing for bankruptcy protection to determine whether the creditor can take steps to recover from the co-signer. This is particularly important if the debtor values the relationship with the co-signer.
If the goal of a debtor is to protect a co-signer, a Chapter 13 bankruptcy is the best option. Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy filing stays proceedings against co-signers if the security is for consumer debt and the co-signer did not become obligated to repay the debt through the ordinary course of business. Under a Chapter 13 bankruptcy, the stay will remain in effect as long as the debtor complies with the bankruptcy plan and the creditor is receiving payments. The stay automatically terminates if the bankruptcy case is closed, dismissed or converted to another Chapter of the bankruptcy code. A creditor may also petition the court to lift the stay if it harms the creditor or if the repayment plan does not provide for full payment of the debt. Finally, if the debt is not fully repaid at the end of the Chapter 13 repayment plan, the co-signer will remain responsible for any outstanding balance. Consequently, before filing for bankruptcy protection, debtors with co-signers must consider more than just their own situation when determining whether filing for bankruptcy protection is in their best interest.
