How does filing bankruptcy affect a co-signer?

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 15, 2021

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How a co-signer is affected will depend on the type of bankruptcy you file and the nature of the debt, namely a consumer or business debt. 

Co-Signers in a Chapter 13 Filing

The Bankruptcy Code uses the term co-debtor to describe an individual who is also liable for a debt instead of co-signer. Under any type of bankruptcy, a discharge doesn’t eliminate the liability of a co-debtor. There is, however, what is known as a co-debtor stay in Chapter 13 cases that prevents creditors from pursuing rights against co-debtors until the case is closed, which may be 3 or even 5 years after the petition is filed. This stay will give you time to get repayment back on track so that creditors will not go after your co-signer. 

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Co-Signers in a Chapter 7 Filing

The result is different, however, in a Chapter 7 bankruptcy. If you receive a discharge of the debt, the discharge is specific to you. Because your co-signer was not a party, their part of the obligation is not discharged. This means that the creditor will turn their collection efforts towards your co-signer once your part is done. 

Exceptions to the Co-Debtor Stay

There are exceptions to the co-debtor stay, however. If your debt arose in the ordinary course of business (as when you cosign an ordinary course loan to a corporation you control), there is no co-debtor stay because it is a business debt, not a consumer debt.

Additionally, if the co-debtor is the one who actually got the “consideration” for the debt (e.g., you cosigned a car loan for your daughter, who actually owns the car), and your Chapter 13 plan proposes not to pay the debt, or if the creditor’s interests would be irreparably harmed by continuation of the co-debtor stay, the creditor can seek relief from the court. 

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