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

If you have a cosigner on a "consumer" or nonbusiness debt and want to file for bankruptcy relief, you might be able to protect the cosigner with Chapter 13 bankruptcy’s codebtor stay. Read on to learn how to protect cosigners during bankruptcy by filing for Chapter 13 and why the protection isn't available in Chapter 7.

A Cosigner’s Payment Responsibility

When a borrower doesn’t have much income or a solid credit history, many lenders require another person to agree to be responsible for the loan if the borrower can’t pay. Lenders typically call this person a “cosigner” because they agree to sign the contract with the borrower. Essentially, a cosigner is another person who is liable for the loan.

Cosigners are responsible for paying back the debt, just like the primary borrower. If the borrower defaults, the lender can go after both the borrower and the cosigner to collect.

Cosigner Debt Liability in Bankruptcy

In bankruptcy, a cosigner is also known as a “codebtor.” When filing for bankruptcy, a debtor must list all codebtors in the bankruptcy paperwork.

One of the benefits of filing for bankruptcy is that, in most cases, the moment you file, the automatic stay prevents creditors from collecting most debts from you. However, in a Chapter 7 case, the automatic stay applies to the debtor only. A cosigner remains liable for the obligation even if the discharge erases the debtor's responsibility to pay the cosigned debt. The discharge doesn't eliminate a cosigner’s liability.

Learn about automatic stay limitations after filing multiple bankruptcy cases.

How to Protect a Cosigner in Chapter 13 Bankruptcy

Unlike Chapter 7 bankruptcy, cosigners are protected to a certain extent by the Chapter 13 codebtor stay (discussed below), so consider paying off the debt through a Chapter 13 repayment plan. If you can repay the debt in full, nothing will be left to collect from the cosigner once the Chapter 13 case ends.

This approach works well with car loans because, in most cases, the time left on the contract will be less than five years, and the loan will be repaid in full. A debtor who qualifies for a three-year plan could extend the plan period to five years if necessary.

However, this approach might not work for all debts. Specifically, you might run into a problem if you propose paying more toward the cosigned debt than it would usually be entitled to receive. Why? Because unless you’re paying all of your debts in full—not just the cosigned debt—it’s likely that other creditors would receive less than what they’d be entitled to otherwise.

Example. Suppose you have three credit card balances of $10,000 each that would typically share $15,000 over the life of your plan or $5,000 each. However, you propose paying the cosigned credit card debt the full $10,000 instead of $5,000. In that case, the two creditors receiving $2,500 instead of $5,000 would likely object.

The Chapter 13 Codebtor Stay

In Chapter 13 bankruptcy, the automatic stay protects cosigners from creditors unless the cosigner becomes liable for the debt in the ordinary course of the cosigner’s business or the Chapter 13 case is dismissed, closed, or converted to a Chapter 7 or Chapter 11 bankruptcy.

Creditors can't collect from cosigners as long as the codebtor is in effect. It’s assumed that the debtor might fully repay the debt through Chapter 13 bankruptcy, and it would be unfair to allow the creditor to receive payment from two sources.

However, the codebtor stay has limitations. Creditors can ask the court to lift the codebtor stay if the cosigner received the benefit of the loan, if the debtor doesn’t propose to pay the cosigned debt through the repayment plan, or if the creditor’s interests would be harmed irreparably if the codebtor stay continues.

When to Consider Legal Consultation

Chapter 13 cases have many issues to address—some of which can conflict. Given the complicated nature of Chapter 13, it’s strongly suggested that you seek a bankruptcy lawyer's advice and learn more about the differences between Chapters 7 and 13 before choosing your bankruptcy chapter.