If you have cosigners or guarantors on your debts, your decision to file for bankruptcy could affect them. However, there are ways to prevent creditors from pursuing your codebtors if you file for bankruptcy. In this article, you'll learn when a lender will require a cosigner, and more, including the following:
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.
Lenders who doubt your ability to repay a loan will often require someone with higher income, more assets, or better credit to be responsible with you. 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.
Your bankruptcy discharge eliminates your responsibility to pay your debts, not the liability of the cosigners and guarantors to pay the debt. Whether a creditor can collect from the cosigner during bankruptcy depends on whether you file Chapter 7 or 13.
If you file for Chapter 7 bankruptcy, your cosigner won't receive any protection from creditors. They'll still be on the hook during and after bankruptcy.
All collection activities against you must stop because of the bankruptcy's automatic stay. However, the automatic stay doesn't extend to your cosigners, and your debt discharge won't impact a cosigner's payment responsibilities. Your creditors will be free to pursue the cosigner or guarantee of your debt.
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, the codebtor stay will end if the court dismisses your case or converts the case from Chapter 13 to Chapter 7 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 for the obligation again. As a result, reaffirming debts isn't usually advised unless you need a particular item or want to help protect cosigners and guarantors from 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 paying the debt until it's paid. In many cases, such as with an automobile, the lender will allow you to continue making the monthly payment. You can read more about keeping cars in Chapter 7 bankruptcy.
Warning about guarantors. It would be highly unusual for a typical bankruptcy filer to have a guarantor on an auto loan or some other secured purchase. However, a lender might not be willing to informally accept monthly payments if a guarantor were in place and had sufficient assets to pay the debt in full.
Important tip. You probably won't want to pay off the debt before filing for bankruptcy. Bankruptcy rules prevent you from favoring one creditor over another, and the bankruptcy trustee could unwind the transaction. Learn about preferential transfers in bankruptcy.
Bankruptcy affects the credit of the person who files for bankruptcy, regardless of the cosigner status. The bankruptcy filing won't impact the nonfiling cosigner's credit directly. Here's how it works.
You file for bankruptcy. If you file for bankruptcy, your debt responsibility will be eliminated—assuming the debt can be discharged—and your credit score will likely decrease. Nonfiling cosigners remain responsible for the debt. A nonfiling cosigner's credit won't be affected unless the cosigner doesn't pay the debt.
Your cosigner files for bankruptcy. Suppose your cosigner files for bankruptcy. In that case, the bankruptcy will wipe out the cosigner's responsibility to pay and impact the cosigner's credit. You'll remain responsible for the debt. Your credit won't decrease unless you stop paying as required.
Learn about bankruptcy and your credit.
Did you know Nolo has made the law easy for over fifty years? It's true—and we want to ensure 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.