Bankruptcy is a personal matter in that it impacts first and foremost the person who files. But what happens when you have cosigners or guarantors on your debts?
Cosigners and guarantors are people who are responsible for paying off your debts if you are unable to do so yourself. Many creditors require a cosigner or guarantor with sound credit to ensure timely payments. For instance, if Jack's parents cosign their son's car loan, they will be held responsible for the debt in the event that Jack can no longer pay it off himself.
Accordingly, you will no longer be responsible for paying off discharged debts when you file for bankruptcy. However, if you have a cosigner or guarantor, those individuals will in most cases be held liable for the debts.
What Happens To Your Cosigners When You File For Bankruptcy?
The degree of protection your cosigners receive depends on whether you file for Chapter 7 or Chapter 13 bankruptcy. (Note that Chapter 7 bankruptcy releases the filer from personal liability for many kinds of debt, while Chapter 13 bankruptcy involves a mandatory repayment plan.) Here is what you need to know:
- Chapter 7 bankruptcy will not protect your cosigners or guarantors from debt collectors. While you will be protected by the automatic stay — a legal injunction that stops creditors from pursuing the borrower — your creditors can still go after your cosigners and guarantors to collect their debts.
To prevent this, you can either choose to pay off your debts despite the discharge granted under Chapter 7 bankruptcy, or you can reaffirm your debts. Reaffirming your debts, unlike paying them off voluntarily, involves relinquishing the discharge and making yourself personally liable for the payments by signing an updated agreement with your lender.
- Chapter 13 bankruptcy will likely protect your cosigners or guarantors from debt collectors. Immediately upon filing for Chapter 13 bankruptcy, a codebtor stay will go into effect and keep collectors from pursuing your cosigners. Meanwhile, you will make regular payments per your court-approved debt-repayment plan. Note, however, that creditors may receive legal permission to lift the codebtor stay under the following circumstances:
- Your cosigner received the primary benefit from the loan.
- Your Chapter 13 repayment plan does include the cosigned debts.
- The codebtor stay will damage the creditor's interest beyond repair.
The courts will also lift a Chapter 13 codebtor stay if the borrower's case is closed, dismissed entirely, or converted to a Chapter 7 bankruptcy. This leads us to our next point.
Will Filing For Bankruptcy Hurt Your Cosigners' Credit?
Before you file for bankruptcy, your cosigners or guarantors will likely be on the hook for any late or missed payments on a loan. This could compromise their credit, as well as your own.
On the other hand, the act of filing for bankruptcy will not in itself affect the cosigner's credit. At this stage, the bankruptcy is attached exclusively to the borrower's social security number, so at most the cosigner's credit report will feature a brief notation on the cosigned debt for which bankruptcy was filed. The bankruptcy will not affect the cosigner's overall credit score.
Ultimately, you must remember that while a Chapter 13 bankruptcy will offer cosigners more protection than a Chapter 7 bankruptcy, it's critical that you consider all your options and file under the chapter that is best for your financial recovery. Cosigners and guarantors accept the risk involved in their role when they agree to sign on the borrower's debt.
For more information on How Bankruptcy Will Affect Your Cosigners, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (515) 451-1260 today.
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