When you file for bankruptcy, your discharge—the order that erases debt—wipes out your obligation to pay back qualifying debts. But your bankruptcy case affects only you. It won’t get rid of the payment responsibility of a cosigner or joint account holder. Here’s what you can expect:
When you file for Chapter 7 bankruptcy, you are protected from creditor collections by the automatic stay. But Chapter 7 doesn’t provide any protection to cosigners or joint account holders—and since creditors can’t pursue you, they’ll direct all collection efforts towards them. But you have options. Here are the steps you can take to protect cosigners and joint account holders.
You can agree to remain liable for the debt by “reaffirming it”—signing a new agreement with the lender. Because many people want to keep their car after bankruptcy, the most common type of debt people reaffirm is a car loan.
Although reaffirming a debt can alleviate a cosigner’s financial pressure by keeping you on the hook, you'll be waiving the benefit of your bankruptcy discharge, which is not a decision you should take lightly. Learn more about reaffirming secured debt in Chapter 7.
Just because you receive a bankruptcy discharge doesn’t 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 by paying off the debt in full. You might get a bit of a discount by redeeming the debt—paying only the value of the purchased property—but you’d have to count on the creditor assuming it wasn’t worth the effort to pursue the cosigner for the difference.
Unlike Chapter 7, Chapter 13 bankruptcy allows you to protect cosigners and joint account holders if you’re paying off the debt in full in the Chapter 13 repayment plan. 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 can’t attempt to collect from them even though they didn’t file for bankruptcy themselves.
Your creditors might be able to obtain court permission to lift the stay if any of the following conditions are met:
If the debt is one that you would pay in full through your plan normally—such as a car loan with a few years of payments remaining—you’d likely be able to protect your cosigner. Why? Because every creditor would still get the same amount they were entitled to receive.
However, not all debts get paid in full. For instance, credit card balances, medical debt, and personal loans often receive less—sometimes much less—in Chapter 13. If protecting the cosigner would require you to pay the cosigned debt more and other obligations less than the amount they’d usually receive, an affected creditor would likely object to the plan.
These issues aren’t the only problems you might face. The Chapter 13 codebtor stay will also end if your case is closed, dismissed, or converted to a Chapter 7 bankruptcy. A knowledgeable bankruptcy lawyer can advise you of the course of action most likely to achieve your goals.
Learn more about cosigner liability in Chapter 13 bankruptcy for more information.