Are Cosigners Liable for My Debt if I File for Chapter 13 Bankruptcy?

Protect your cosigners with Chapter 13 bankruptcy's codebtor stay.

by:  , Attorney

If you have cosigners on any of your consumer (nonbusiness) debts and you want to file for bankruptcy relief, you may be able to protect them with Chapter 13 bankruptcy’s codebtor stay. Read on to learn more about how to protect your cosigners with Chapter 13 bankruptcy.

What Is a Cosigner?

A cosigner is essentially another person who is liable on your loan. Cosigners are responsible for paying back the debt just like the primary borrower. If you default on your loan, the lender can go after both you and your cosigners to collect its debt. When reviewing loan applications, lenders generally require a cosigner if they believe the primary borrower does not have enough income or assets to get approved on his or her own.

Cosigners in Bankruptcy

The moment you file for bankruptcy, the  automatic stay  prevents creditors from trying to collect their debts from you. When you complete your case and receive a discharge, your personal liability is wiped out for all discharged debts. However, your discharge does not eliminate your cosigners’ liability. They remain on the hook for paying back your debt.

If you want to protect your cosigners, you can do so by filing for Chapter 13 bankruptcy and paying off the debt through your repayment plan. Unlike in Chapter 7 bankruptcy, your cosigners are protected to a certain extent by the Chapter 13 codebtor stay (discussed below).

The Chapter 13 Codebtor Stay

In Chapter 13 bankruptcy, your cosigners are protected from creditors because of the codebtor stay. Creditors are bound by the codebtor stay unless:

  • the cosigner became liable for the debt in the ordinary course of his or her business, or
  • your Chapter 13 is dismissed, closed, or converted to a Chapter 7 or Chapter 11 bankruptcy case.

This means that your creditors are prohibited from going after your cosigners (even though they did not file their own bankruptcy) as long as the codebtor stay is in effect. Essentially, Chapter 13 bankruptcy allows debtors to protect their cosigners by paying off cosigned debts through their repayment plan under the protection of the codebtor stay.

However, be aware that the codebtor stay has its limitations. Creditors have grounds to ask the court to lift the codebtor stay if:

  • it was your cosigner who actually received the benefit or consideration from the loan
  • you don’t propose to pay the cosigned debt through your repayment plan, or
  • the interests of the creditor would be irreparably harmed if the codebtor stay continues.

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