When you have a cosigner on any of your debts you are both 100% liable for the outstanding debt. Having a cosigner on an account allows individuals with lower income or credit to obtain additional credit. Typically, creditors will not take any action against cosigners until you fall behind on payments. But how does filing bankruptcy affect these individuals?
Who is a Cosigner?
Merriam-Webster’s Dictionary defines a cosigner as “a person who signs an official document (such as a loan, contract, or law) with another person.” When you are new to credit you might receive help from a friend or family member when getting a loan; i.e. they might cosign for a car loan to help you get approval. What this means is that even though the car loan is “yours”, if you fail to make payments the lender can go after your family member or friend for the outstanding debt.
Treatment of Cosigners in Chapter 7 Bankruptcy
When you file Chapter 7 bankruptcy you submit a list of all of your creditors and debts on your petition. You also list the names and addresses of anyone who is a joint owner on your accounts. The automatic stay goes into effect when you file your case. At this time your creditors cannot take any adverse actions against you. However, assuming your your cosigner did not file bankruptcy too, the bankruptcy protection does not apply to them. If you do not reaffirm the debt in bankruptcy you no longer have a legal obligation to pay that debt. At this time your creditor can continue their efforts to collect the debt from the cosigner. The cosigner is 100% liable for any outstanding debt that exists.
Chapter 13 Bankruptcy and the Codebtor Stay
Chapter 13 Bankruptcy offers better protection for your cosigner. In Chapter 13 you have the ability to bring these loans current and pay off these accounts in full. When you file Chapter 13 bankruptcy the automatic stay applies to both you and the cosigner of any of your accounts. If there is still an outstanding balance on joint debt at the end of your payment plan you will receive your discharge for the remaining debt. However, your cosigner will still be liable for the remaining portion of that debt. Also, keep in mind that the codebtor stay extinguishes if your Chapter 13 Bankruptcy case is dismissed or converted to a Chapter 7 case.