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What Happens to Cosigners When You File for Bankruptcy?

When your credit is not good enough to qualify for a loan, the lender may require a co-signer.  This practice is common with young people who have not established credit but want to buy a car or a home, and their parents help them out by co-signing.

Unfortunately, you cannot usually foresee tough economic times, job loss, illness, or a divorce, which can put pressure on finances.  Under economic stress, you may have to consider filing bankruptcy.

Chapter 7 bankruptcy does not offer any protection for your co-signer.  While you can discharge the debt, your co-signer is legally responsible for paying your loan when you default on payments.  That means creditors have the right to take actions against your co-signer if you file Chapter 7 bankruptcy.

The Bankruptcy Code refers to a co-signer as a codebtor.  The person who co-signs is legally also a debtor on the loan.  Under 11 USC § 1301 - Stay of Action Against Codebtor, when you file Chapter 13, the stay prevents creditors from taking legal actions, not just against you, but also against your codebtor.

A Chapter 13 bankruptcy may protect your co-signer.  However, you must adhere to the Chapter 13 payment plan and make payments on the cosigned loan.  The loan must also be for a consumer debt, in other words a personal and not a business debt.  Also, your cosigner cannot benefit in any way from the debt proceeds.  To ensure your co-signer has no liability for your debt at the end of your bankruptcy discharge, you must pay off the debt in full.  If any amount of the co-signed debt remains after bankruptcy discharge, your co-signer would be liable for paying it.

Discuss bankruptcy with an experienced bankruptcy attorney. It is a good idea when considering bankruptcy to determine what consequences your financial situation may have on your co-signer.

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