Bankruptcy can be an incredible tool for those struggling under the burden of debt. A personal bankruptcy has the life-changing ability to eliminate debt, protect assets, and stop creditor harassment. If your debt is backed by a cosigner, or if you are a cosigner on someone else’s debt, it is important to understand what a bankruptcy might mean for these obligations.
A cosigner is a person who agrees to pay back a loan in the event that you are unable. When taking out a loan, if a borrower does not meet certain minimum requirements, the lender may require a co-signer with a higher income or credit score to agree to pay if the borrower defaults. A cosigner will not typically receive the discharge of debt as a result of the borrower declaring bankruptcy, but there ways to protect your cosigners if you are considering filing.
Whether filing for Chapter 7 or Chapter 13 bankruptcy, the bankruptcy code requires that you disclose every co-debtor or cosigner for every debt you own. Co-debtors and cosigners will receive notice of your petition. However, this is not the same as having the cosigner’s obligation to pay discharged in a bankruptcy. The general rule is that a bankruptcy can discharge the obligation to pay, but only for the person who declares bankruptcy. This means that even if you have the underlying debt discharged, a cosigner could still be forced to pay back the debt.
There are steps that you can take to protect your cosigners in a bankruptcy. Cosigners are most protected in a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, debts are placed under the protection of an automatic stay and reorganized into a payment plan. Subject to certain exceptions, cosigners on consumer debts get the benefit of an automatic stay, just as a borrower would. In a Chapter 13 bankruptcy, if the entire debt is a paid under the repayment plan, the lender cannot pursue your cosigner for payment. However, if the entire debt is not satisfied or your petition is dismissed or converted to a Chapter 7 bankruptcy, the cosigner could still be liable for this debt.
In a Chapter 7 bankruptcy, the options for protecting cosigners are much less attractive. The automatic stay does not extend to your cosigners. This means that lenders may pursue cosigners for payment while your bankruptcy is pending and even after your debts have been discharged. There are options, like affirming the debt or voluntary pay off, that may help protect our cosigner if you are filing for Chapter 7. The experienced, knowledgeable attorneys of Levitt & Slafkes, P.C., can help you decide if these options are right for you.
If you are considering filing for bankruptcy, let us help you explore all of your options. We are bankruptcy lawyers who know how to give you a fresh financial start. Contact our New Jersey law firm online by filling out the form or by calling 973-323-2953 to schedule a free initial consultation with an attorney at Levitt & Slafkes, P.C..