Are Cosigners Affected when Filing for Bankruptcy?

 Posted on January 19, 2014 in Chapter 7 bankruptcy

In some cases when a person has little or no credit history, it might be necessary to have a cosigner on a loan application.  It can be the difference between being approved for a loan or credit card and being denied.  Good cosigners have better credit scores and have shown an ability to handle their debt responsibly.  Typical cosigners include parents, relatives, or spouses.  But these cosigners are agreeing to be liable for debts if they are unpaid.

Since a bankruptcy can release or lessen debt obligations, it is important to know how cosigners are affected.  When they cosign for a loan, they are promising to take care of a debt if the debtor cannot.  A good example of when a debtor cannot handle their debt is when they file for bankruptcy.  What cosigners are responsible for after a bankruptcy is dependent on which chapter of bankruptcy is filed.

In Chapter 7 bankruptcy, the debtor’s responsibility to repay debts is eliminated.  This will stop creditors from contacting the debtor directly for repayment due to the automatic stay.  Unfortunately this protection is not extended to cosigners or guarantors.  They can still be contacted for the repayment of outstanding debts.

A way to protect a cosigner is by reaffirming the debts prior to the discharge.  This essentially gives up the protection of a Chapter 7 bankruptcy and “reaffirms” the responsibility to repay a debt.  Another way is to pay off the debt after the bankruptcy is completed.

A Chapter 13 bankruptcy offers more protection to cosigners.  That is because it allows the debtor to repay the cosigned portion of the debts personally.  All parties are protected by the automatic stay in this chapter of bankruptcy.  The stay can be lifted by the bankruptcy court if certain circumstances are met.  But in some cases, the cosigner is off the hook for debts included in the repayment plan.

If you are considering filing for bankruptcy, then make sure it is the right choice.  Contact a skilled bankruptcy attorney in San Antonio today to discuss your options and understand the repercussions.