A cosigned debt is a debt where one or more person guarantees that that the primary borrower will pay the debt. Legally, a cosigner or co-debtor is equally responsible on the debt. If the primary borrower does not pay the debt, the creditor or lender can pursue the cosigner for the debt. Late or missed payments affect the cosigner’s credit the same way that it affects the credit of the primary borrower. The effect that a bankruptcy has on a cosigned debt and/or cosigner depends on the type of bankruptcy.
In a Chapter 7 bankruptcy or straight bankruptcy the Debtor (person filing bankruptcy) asks the Court to issue a discharge on debts. This discharge legally eliminates the creditor’s rights to collect from the debtor. The cosigner does not receive the same benefit from the bankruptcy. The cosigner may then be stuck paying the debt. There are options that a Chapter 7 debtor or the cosigner can pursue to deal with the debt.
If the cosigned debt is a secured debt such as a mortgage loan or a car loan, the debtor in a Chapter 7 bankruptcy may protect a cosigner by agreeing to keep paying to keep the collateral (the house or car). With other types of cosigned debts the cosigner can maintain the payments and a debtor in bankruptcy may informally agree to pay them back after the bankruptcy proceeding is over. The cosigner may also discharge the debt in a bankruptcy if they so choose.
In a Chapter 13 bankruptcy the debtor asks the Court to approve a 3 to 5 year reorganization plan. As part of the Chapter 13 reorganization bankruptcy a debtor may be able to protect a cosigner using what’s called the co-debtor stay. This Court ordered protection keeps creditors from pursing the cosigner for the debt as long as the debtor in bankruptcy has fashioned their plan to pay the cosigned debt through their plan. This Court ordered protection does not work with business debts or with debts from which the cosigner received the majority of the benefit.
The strategies and rules that go into helping people in bankruptcy achieve their goals vary from person to person. A consultation with an experienced bankruptcy lawyer is a critical first step in achieving your fresh start.
Please feel free to call us now at 317-759-1483 or send us an email to schedule a free consultation with an attorney to review your personal situation.
About the Attorneys
Andrew Sawin received his Bachelor of Arts degree from Indiana University in 1989 and his Doctor of Jurisprudence from Indiana University School of Law – Indianapolis in 1995. He has concentrated his practice in the field of Consumer Bankruptcy for the past 15 years.
Richard Shea graduated from California State Polytechnic University, Pomona with a Bachelor of Science degree in Hotel & Restaurant Management in 1995 and received his Doctor of Jurisprudence from Indiana University School in 1998.
Larry Des Jardines graduated Summa Cum Laude with a Doctor of Jurisprudence degree from Indiana University School of Law. Larry is a member of the Indianapolis Bar Association, the Indiana State Bar Association, the American Bar Association and the National Association of Consumer Bankruptcy Attorneys.