Your decision to file for bankruptcy extends further than just affecting your life, especially if you have cosigners on some of your debts.
Find out how Chapter 7 and Chapter 13 bankruptcy will affect the repayment obligation of your cosigners and the steps that you can take to protect them.
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, the court discharges your debts. The trustee may also liquidate or sell some of your property in order to repay your creditors.
After you file a Chapter 7 bankruptcy, all collection activities against you will cease because of the automatic stay associated with the filing. In most cases, your creditors will not be able to legally garnish your wages, go after your property, or empty your bank accounts. However, the automatic stay does not extend to your cosigners, so your creditors will be free to pursue them to collect on the debt.
Protecting Your Loan Cosigners
Fortunately, there are ways for you to protect your cosigners even if you do file for Chapter 7. While you will no longer be obligated to pay back discharged debts, you can still voluntarily pay off the debts after bankruptcy to prevent action against your cosigners.
For example, consider a vehicle loan that you had a friend cosign on. If you decide to surrender the vehicle in a Chapter 7 bankruptcy, your cosigner will still be liable for the debt. This means that a creditor can collect from the cosigner. If you choose to keep the vehicle and maintain payments, the creditor will not collect from the cosigner.
You may also choose to reaffirm your debts before receiving a Chapter 7 discharge, and when you reaffirm the debt, you make yourself personally liable for the obligation. While this is typically not recommended, it can help to protect your cosigners from your creditors.
Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, also known as a reorganization bankruptcy, you’ll be able to keep your property while repaying a portion of your debts over a period of 35 years. This is where Chapter 13 differs from Chapter 7 bankruptcy, as you won’t need to surrender some of your property. Since you’ll be required to use the income to repay on your debts, you will need to show to the courts that you can afford to meet your required payment obligations.
Protecting Your Loan Cosigners
A Chapter 13 bankruptcy will offer your cosigners much more protection than Chapter 7, and it allows you the opportunity to pay off your cosigned debts with your repayment plan. The automatic stay will protect your cosigners from your creditors on non-business debts, but there are some instances in which creditors may ask the court to remove the automatic stay to begin collections:
- The creditor will experience irreparable harm if the automatic stay continues
- You have not proposed to fully pay off the debt in your Chapter 13 repayment plan
- Your cosigner received the consideration for the claim
Once your Chapter 13 is completed the creditor may only be able to collect a portion of the debt from the cosigner.