Friends and relatives can be a great support in hard times. This is especially true if you need a little “back up” for financial issues. Sometimes people wthl low credit scores are required to have a cosigner on loans and credit applications. What happens to those friends or relatives that stepped up to help you now that you are considering bankruptcy as a means to start fresh and get out from under your mounting debt. Read further to find out what the difference may mean for a cosigner in a chapter 7 or 13 bankruptcy.
Many times cosigners are friends or relatives who have a stronger credit history than the primary borrower so the borrower can qualify for more attractive loan terms. Your cosigner took on the legal guarantee of payment when signing their name to the dotted line. Your decisions when it comes to bankruptcy will impact their finances as well. While deciding what bankruptcy path will work best for you, the cosigners financial needs may also want to be considered. (This tends to be a very touchy topic since cosigners are usually close relatives or friends. Talk to your attorney about what is best for you and how it will impact your cosigner.)
Chapter 7 Bankruptcy – If you choose this type of bankruptcy your discharge will eliminate your liability to the deb but not your cosigners. When you file for Chapter 7 bankruptcy, you are protected by the automatic stay. However, your creditors are free to go after your cosigners to collect their debts. In fact, since creditors are prohibited from pursuing you, they will direct all collection efforts towards your cosigners. There are, however, steps you can take to protect your cosigners. You can reaffirm the debt which means signing a new agreement with your lender. Reaffirming that debt can alleviate some of their burden by keeping you on the hook. This is not a decision to be made without careful consideration and advice of your bankruptcy attorney. Another method to protect your cosigner is to continue paying the debt off until it is paid off in full.
Chapter 13 Bankruptcy – Unlike a chapter 7, this bankruptcy allows you to protect cosigners and joint account holders through a codebtor stay while paying off the cosigned obligation in your repayment plan. 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. Due to the fact that these are delicate decisions that will impact you and your cosigner, discuss this matter fully with your attorney before you decide which bankruptcy path to take.