If you have cosigners or guarantors on any of your debts, your decision to file for bankruptcy will affect them. If you do file for bankruptcy, however, 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 a lot more serious than merely providing a reference. A cosigner or guarantor is 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 a difficult time 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 contexts as well. For instance, landlords ask first-time renters or those with past credit issues to have someone guarantee the obligation. The same holds true when contracting for vehicle, equipment, and furniture leasing.
How Is a Guarantor Different Than a Cosigner?
Unlike a cosigner who is equally responsible for each payment, the guarantor usually is only liable on 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.)
Your bankruptcy discharge only eliminates your obligation to pay discharged debts. It doesn’t 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.
When you file a Chapter 7 bankruptcy, all collection activities against you must stop because of the bankruptcy’s automatic stay. However, the Chapter 7 automatic stay doesn’t extend to your cosigners and guarantors. So your creditors are free to pursue them to collect the debt.
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.
A Chapter 13 bankruptcy offers greater 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.