If you have cosigners or guarantors on any of your debts, your decision to file bankruptcy may also affect them. If you do file for bankruptcy, however, there are ways to protect your cosigners. Read on to learn more about how bankruptcy affects the obligation of your cosigners and guarantors to pay your debts and what you can do to protect them.
What Is a Cosigner or Guarantor?
A cosigner or guarantor is essentially a person who is on the hook and responsible for paying back your debt if you are unable to. Creditors normally require a cosigner or guarantor (usually someone with higher income or better credit) if they are skeptical about your ability to repay the debt on your own.
There are a few technical differences between a cosigner and a guarantor. For example, a creditor can pursue a cosigner at any time. But with guarantors, creditors usually must attempt to collect from the primary borrower first before going after the guarantor. However, for purposes of bankruptcy this distinction doesn't matter since both will be obligated to pay the debt if you can’t.
How Does Bankruptcy Affect Cosigners and Guarantors?
Your bankruptcy discharge only eliminates your obligation to pay discharged debts. It does not affect the responsibility or liability of the cosigners and guarantors on your debts. However, how much protection they will receive when you file depends on whether you file a Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
When you file a Chapter 7, all collection activities against you must stop because of the bankruptcy’s automatic stay. However, the Chapter 7 automatic stay does not extend to your cosigners and guarantors. So your creditors are free to pursue them to collect the debt.
How Can You Protect Cosigners And Guarantors If You File Chapter 7 Bankruptcy?
Even if you decide to file a Chapter 7 bankruptcy, you can take steps to protect your cosigners and guarantors from collection efforts by creditors. Here are your options.
Reaffirm The Debt
Prior to receiving a discharge in Chapter 7, you can choose to reaffirm any of your debts. When you reaffirm a debt you give up the benefit of your discharge and make yourself personally liable on the obligation again. As a result, reaffirming debts is generally not advised; however, it may help protect your cosigners and guarantors from your creditors. (To learn more, see Reaffirming Secured Debt in Chapter 7 Bankruptcy.)
Pay Off The Debt
After a Chapter 7 discharge you are no longer obligated to pay back any discharged debts. However, this does not preclude you from voluntarily paying off your debts after the bankruptcy. If you want to protect your cosigners and guarantors, you can continue making payments on the debt until it is paid off.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy offers much more protection to your cosigners and guarantors, and gives you the opportunity to pay off cosigned or guaranteed debts through your repayment plan.
The Chapter 13 Codebtor Stay
When you file a Chapter 13, your cosigners and guarantors on consumer (non-business) debts are protected from your creditors under the automatic stay. This is called the Chapter 13 codebtor stay. However, your creditors can still ask the court to lift the automatic stay under the following circumstances:
- It was your cosigner or guarantor who actually received the consideration for the creditor’s claim.
- You are not proposing to pay the debt off in full through your Chapter 13 plan.
- The creditor will suffer irreparable harm if the stay continues.
Also, keep in mind that the codebtor stay will end if your Chapter 13 is dismissed or converted to a Chapter 7 bankruptcy.
(To learn more about the automatic stay, see Bankruptcy's Automatic Stay.)