How Filing Bankruptcy Impacts Your Co-Signers

Posted on: 15 August 2018

You must consider a variety of factors when deciding to file for bankruptcy, and how your case affects your co-signers should be one of them. Here are two important things you must know about how your co-debtors will fare once you submit your bankruptcy petition to the court.

Only Chapter 13 Provides Protection

While it's true filing chapter 7 bankruptcy wipes out people's responsibility to pay most types of debt, that's only true for the petitioners (and their spouses if they're filing jointly). Any co-signers on the discharged accounts are still legally required to pay the debts, and you can be certain creditors will go after your co-debtors once they realize they can no longer collect the cash owed from you.

If you want to protect your co-signers from being hounded and/or sued by creditors for your debts, your best option is to file chapter 13. Although you are required to repay some of your debts as part of the program, this type of bankruptcy extends the automatic stay (the law that forces creditors to cease debt collection activity while your bankruptcy case is active) to your co-signers. This means your co-debtors won't have to deal with collection calls, wage garnishments, or other creditor actions as long as your case remains alive in bankruptcy court.

Be aware, though, that there are a few exceptions. Creditors can petition the court to eliminate the automatic stay protection for your co-debtor if the loan proceeds received the bulk of the benefit from the debt, your plan doesn't account for the co-signed debt, or the creditor will be significantly harmed by the stay. If any of these apply to your case, it's best to consult with a bankruptcy attorney who can advise you on the best way to handle these issues.

Co-Signer's Credit Score Will Drop

Co-signed debts appear on the credit reports of all the people who have taken legal responsibility for it, and any and all account activity will be reported to the credit bureaus for all signers. This means when you file bankruptcy for a co-owned account, it will show up on your co-signer's credit report where it can remain for up to 10 years.

Unfortunately, there's not much you can do to keep this from happening. One option is to get the co-signer's name removed from the account before you file bankruptcy, but many creditors will not agree to that since it reduces their ability to collect the money they're owed if you default.

The other option is to pay the account off and close it before filing your petition. However, depending on the amount you paid and the time period, the bankruptcy trustee may attempt to get some of the money from the creditor and apply it to your bankruptcy case.

Filing bankruptcy when you have a co-signer can be a complex matter. It's best to consult with a bankruptcy lawyer for information on how to protect yourself and your co-debtors during the process.