by: Baran Bulkat, Attorney
When you file for bankruptcy, your discharge only wipes out your obligation to pay back discharged debts. This means that if you have a cosigner or a joint account with another person, he or she will typically remain on the hook for that debt. Read on to learn more about the effect of bankruptcy on cosigners and joint account holders as well as how you can protect them after bankruptcy.
What Happens to Cosigners and Joint Account Holders in Bankruptcy?
As discussed, your bankruptcy discharge only eliminates your liability on discharged debts. Your lender or credit provider can still pursue your cosigners and joint account holders to recover its loan. The extent to which cosigners or joint account holders can benefit from your bankruptcy depends on whether you file for Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
Unfortunately, Chapter 7 bankruptcy does not provide any protection to cosigners or joint account holders. When you file for Chapter 7 bankruptcy, you are protected by the automatic stay. However, your creditors are free to go after your cosigners and joint account holders to collect their debts. In fact, since creditors are prohibited from pursuing you, they will direct all collection efforts towards your cosigners and joint account holders.
How to Protect Cosigners and Joint Account Holders After Chapter 7 Bankruptcy
If you decide to file for Chapter 7 bankruptcy, there are steps you can take to protect cosigners and joint account holders from your creditors. Here are your options.
Reaffirm the Debt
If you wish to remain liable on an existing debt after bankruptcy, you have the option to reaffirm it by signing a new agreement with your lender. The most common type of debt people reaffirm is their car loan because they wish to keep their car after bankruptcy.
If you have cosigners or joint debtors on an account, reaffirming that debt can alleviate some of their burden by keeping you on the hook. However, because you are waiving the benefit of your bankruptcy discharge by reaffirming, it is not a decision you should take lightly. If you want to protect your cosigners or joint account holders, a better option may be to keep making payments on the debt without making yourself personally liable by reaffirming (discussed below).
See Reaffirming Secured Debt in Chapter 7 for more information.
Continue Making Payments or Pay Off the Debt in Full
Just because you receive a bankruptcy discharge does not mean that you can’t voluntarily continue to make payments on your debts. Generally, the best way to make sure your cosigners and joint account holders will not be negatively affected by your bankruptcy is to continue making regular payments or paying off the debt in full.
Chapter 13 Bankruptcy
Unlike a Chapter 7, Chapter 13 bankruptcy allows you to protect cosigners and joint account holders through a codebtor stay while paying off the cosigned obligation in your repayment plan.
The Chapter 13 Codebtor Stay Protects Cosigners and Joint Account Holders
If you file for Chapter 13 bankruptcy, a codebtor stay immediately goes into effect and protects cosigners and joint account holders on all consumer (non-business) debts. As long as the codebtor stay is in effect, your creditors are prohibited from attempting to collect their debts from your cosigners or joint account holders even though they did not file for bankruptcy themselves.
However, your creditors may be able to obtain court permission to lift the codebtor stay if any of the following conditions are met:
- Your cosigner or joint account holder received the consideration or primary benefit from the creditor’s loan.
- Your Chapter 13 repayment plan does not propose to pay the cosigned debt.
- The creditor’s interest will be irreparably harmed if the codebtor stay remains in effect.
Further, the Chapter 13 codebtor stay will end if your case is closed, dismissed, or converted to a Chapter 7 bankruptcy.
See Cosigner Liability in Chapter 13 Bankruptcy for more information.