There are a variety of different types of debts that can affect a person or family. In some cases, a person may receive assistance from a friend or family member when they sign a loan. For example, a person may be looking to purchase a new car, but if they do not have a significant credit history, they may not be able to obtain a loan on their own. Having a parent or another person who has a high credit score cosign the loan will provide the lender with a better guarantee that the debt will be repaid. However, if the person experiences financial hardship that affects their ability to make ongoing payments on the loan, the co-signer may be obligated to repay the loan. While bankruptcy may be an option that can help address these debts, it is important to understand how a co-signer will be affected in these cases.

How Chapter 7 and Chapter 13 Bankruptcy Affects Co-Signers

When a person cosigns a loan, they will be providing the lender with the guarantee that ongoing payments will be made. If the primary debtor defaults on the loan, the lender may seek repayment from the co-signer, and this may include contacting them and asking them to make payments or pursuing a legal judgment to recover the balance owed on the loan.

If the primary debtor chooses to file for bankruptcy, this may affect a co-signer differently depending on the type of bankruptcy that the person pursues. In a Chapter 7 bankruptcy, a debtor will discharge their debt, and they will no longer be obligated to repay the amount owed to the lender. However, this will not eliminate the co-signer’s obligation to repay the debt, so the lender may seek to recover the remaining amount owed from the co-signer. In many cases, a debtor will also include their co-signer in a Chapter 7 filing, which will discharge any obligations they had toward that person. Depending on the person’s ongoing relationship with the co-signer, they may still choose to make informal arrangements to repay the person or make up some of what is owed, even if they no longer have a legal obligation to do so.

If you are a homeowner who has defaulted on your mortgage payments or are experiencing other issues that have affected your ability to repay your debts, you may be considering bankruptcy. Filing for bankruptcy will allow you to halt foreclosure proceedings as you determine your options. If you plan to pursue a Chapter 7 bankruptcy, this will allow you to discharge a number of different types of debts, eliminating the requirement to repay what you owe and ensuring that you will receive a fresh financial start. However, the discharge of your mortgage loan will allow your lender to proceed with a foreclosure and take possession of your home. To prevent this, you may choose not to include your mortgage in your bankruptcy, and if you continue making payments while also making up any past-due payments or related fees, you may be able to maintain ownership of your home. 

In these situations, mortgage lenders will often ask homeowners to reaffirm their loans and agree that they will continue to be liable for the debt that is owed. By understanding how reaffirmation agreements are used and how they may affect you in the future, you can determine whether signing this type of agreement will be a good idea.

Benefits of Reaffirmation

Reaffirmation agreements primarily benefit lenders, since they ensure that a debtor will be liable for the debts that are owed. While bankruptcy will discharge a debtor’s obligation to pay debts, it will not remove the lien on a home, and a lender will have the right to take possession of the property. If you agree to reinstate the debt, you can continue to own your home as long as you remain current on your mortgage payments. Since payments made toward a reaffirmed loan will be reported to credit agencies, this may help you rebuild your credit after bankruptcy.

Nobody wants to file for bankruptcy. Even though you can discharge your debts so that you are no longer legally liable for them, there are a few negative consequences that come from filing for bankruptcy, including a hit to your credit score. However, if you are one of the millions of Americans who are struggling financially, bankruptcy may be the solution. The current coronavirus pandemic has hit the U.S. economy hard, causing unemployment to soar to levels unseen since the Great Depression. The coronavirus has affected many things, including making temporary changes to the bankruptcy code.

The CARES Act

Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the economic crisis emerging from the pandemic. Valued at more than $2 trillion, the CARES Act was monumental for the U.S. as it is the largest stimulus package to become enacted in the history of the country. One of the most popular benefits the Act provides is the economic impact payments that are given to most households and individuals. Single tax filers will receive $1,200, while married couples who file jointly will receive $2,400. Each child that an individual or married couple has that is under 17 will receive an additional $500.

If you injured someone by unlawfully driving while intoxicated, the resulting personal injury debt would be a priority debt in bankruptcy.

Priority Debts

For many weeks our blog posts have been considering how bankruptcy deals with “priority” debts. Examples of these special debts that we’ve covered include child/spousal support, income taxes, and wages owed employees. Sections 507(a)(1),(4), and (8) of the U.S. Bankruptcy Code.

There’s one more kind of priority debt. It does not come up often but if it affects you, you need to know about it.

One of the most important aspects of bankruptcy is that all debts are not equal. “Priority” debts are treated special in a number of ways.

Debts Are Different So the Law Recognizes Some Differences

The law does not treat all debts the same. That’s because you have different kinds of creditors that you owe for very different reasons. The law tries to be practical and so to some extent it respects these differences.

Your debts all fall into three categories: