If you have cosigners or guarantors on any of your debts, your decision to file for bankruptcy will affect them. However, if you do file for bankruptcy, there are ways to prevent your creditors from pursuing your codebtors.
Read on to learn more about how bankruptcy impacts the obligation of your cosigners and guarantors to pay your debts and what you can do to protect them.
Deciding to sign a loan as a cosigner or guarantor is more serious than merely providing a credit reference. A cosigner or guarantor agrees to be responsible for paying back a debt if you're unable to do so. Here's how it works.
First-time borrowers, borrowers with poor credit histories, and new businesses often have difficulty getting funding. Many lenders are more likely to make a loan if the borrower can get someone else—a guarantor—to agree to be responsible for the debt.
Specifically, creditors require a cosigner or guarantor (usually someone with a higher income, more assets, or better credit) if they doubt your ability to repay the debt on your own. For instance, a bank might ask that you supply a guarantor for your loan for any of the following reasons:
A guarantor might be required in other situations, as well. For instance, landlords ask first-time renters or those with past credit issues to have someone guarantee the obligation. The same applies when leasing a vehicle, equipment, and furniture.
Unlike a cosigner who is equally responsible for each payment, the guarantor usually is only liable for the loan if the borrower fails to fulfill the payment obligation. For instance, 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. The guarantor must make the lender whole (pay off the loan) if the borrower can't do so.
The distinction can be important because although a cosigner might be able to step into the borrower's shoes and make the monthly payments, a guarantor will likely be on the hook for the entire balance.
To find out how a guarantor can get rid of a guarantee, read Bankruptcy and the Personal Guarantee.
How much protection cosigners and guarantors will receive will depend on whether you file Chapter 7 or 13. Why? Because your bankruptcy discharge eliminates your responsibility to pay your debts, not the liability of the cosigners and guarantors to pay their debt.
If you file for Chapter 7 bankruptcy, your creditors will be free to pursue the cosigner or guarantee of your debt. This applies even though all collection activities against you must stop because of the bankruptcy's automatic stay. Because the automatic stay doesn't extend to your cosigners and guarantors and your debt discharge won't impact their payment responsibilities, they'll still be on the hook during and after bankruptcy.
However, you can take steps to protect your cosigners and guarantors from collection efforts by creditors when you file for Chapter 7. Here are your options.
Before receiving a discharge in Chapter 7, you can choose to reaffirm secured debts such as car loans, mortgages, and other certain other credit accounts (jewelry, computer, and furniture accounts are often secured by the purchased product, meaning that you must return it if you fail to pay as agreed). 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 isn't usually advised unless you need the particular item; however, it might help protect your cosigners and guarantors from your creditors.
To learn more, see Reaffirming Secured Debt in Chapter 7 Bankruptcy.
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. Keep in mind that even though a cosigner can step in and make a monthly payment for the borrower, a guarantor will more likely be required to pay the entire outstanding balance.
If you can't pay the balance in full—which would be unusual after bankruptcy—you'll likely need to negotiate payments with the creditor. But be forewarned that the creditor might not agree to a payment arrangement if the guarantor has sufficient assets to pay the debt in full.
A Chapter 13 bankruptcy offers more protection to your cosigners and guarantors. Plus, you get more time to pay off the cosigned or guaranteed debt through your three- to five-year Chapter 13 repayment plan.
When you file a Chapter 13, the automatic stay protects cosigners and guarantors from creditors collecting on consumer (nonbusiness) debts—called the Chapter 13 codebtor stay. Your creditors can still ask the court to lift the automatic stay under the following circumstances:
Also, keep in mind that the codebtor stay will end if the court dismisses your case or converts the Chapter 13 to a Chapter 7 bankruptcy.
Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.