If a family member or close acquaintance has agreed to cosign on a loan or credit account for you, they are liable for the full amount due. That means the creditor can seek repayment from your cosigner even if you seek bankruptcy protection. In deciding how to proceed, you need to consider the effect of your actions upon your cosigner who is not filing for bankruptcy.
Under bankruptcy law, most individuals have a choice between Chapter 7, which wipes out most debts, and Chapter 13, which allows for partially paying off debts over a three-to-five-year period in accordance with a court-supervised plan. Which option you choose will make a significant difference to your cosigner.
In a Chapter 7 bankruptcy, an automatic stay goes into effect that stops your creditors from taking any action to collect their debts from you. However, the stay doesn’t prevent them from taking action against your cosigner. Furthermore, while Chapter 7 relieves you of responsibility for a debt, the discharge doesn’t affect your cosigner’s liability. That means he or she is left on the hook to the lender until the loan is paid off, without having any recourse against you.
In a Chapter 13 bankruptcy, on the other hand, the automatic stay not only protects you but also stops creditors from trying to collect your debt from the cosigner. The bankruptcy judge may lift the stay as to your cosigner only in these circumstances:
- The cosigner benefited from the loan.
- You don’t pay off the debt through your repayment plan.
- The creditor will suffer irreparable harm if the stay is not lifted.
If you pay down the cosigned debt through your repayment plan, your cosigner will only be liable for the unpaid balance, if any, once the Chapter 13 ends.
However, not everyone qualifies for Chapter 13. If you have no choice but to file for Chapter 7, there may be ways to protect your cosigner, either out of a sense of moral obligation or because you need their good will. One option is to reaffirm the debt, which means you remain personally liable after the Chapter 7 case is over. This might be a reasonable option if you discharge enough of your other debts. However, if you don’t want to take this risk, you can discharge the cosigned debt and then continue paying it voluntarily. Doing this creates no legal obligation on your part and allows you to postpone payment if it becomes too difficult.
Jeff Field & Associates helps clients throughout the Atlanta metropolitan area in all aspects of bankruptcy proceedings. We have offices in Athens, Douglasville, Gainesville, Lawrenceville, Marietta and Scottdale. To schedule an appointment, call 404-381-1278 or contact us online.