What happens to a co-signer of a loan if the original signer files bankruptcy?

Get Legal Help Today

 Secured with SHA-256 Encryption

What happens to a co-signer of a loan if the original signer files bankruptcy?

I am a co-signer on a loan of about $45,000 and the original person who signed the loan is filing bankruptcy. Will I get stuck paying the debt if this debt is erased from the original person?

Asked on July 29, 2011 Virginia

Answers:

M.D., Member, California and New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

What happens to a co-debtor when a debtor files for bankruptcy depends upon the type of bankruptcy that is filed. 

In a Chapter 13, the co-debtor, as well as the debtor, receives what is known as an "automatic stay". This means that for the term of the bankruptcy no collection action can be taken against them. The reason the stay extends to the co-debtor is that the debtor will be paying the debt through the Chapter 13 plan.

However the co-debtor stay only applies to consumer debts. So if the co-debtor signed for a business debt the stay does not apply. Additionally, the stay also ends if the Chapter 13 case is dismissed or if the case is converted to a Chapter 7. Finally the co-debtor stay may also be lifted if one of the following things can be shown by the creditor that: the Chapter 13 plan does not provide for full payment of the debt; or the creditor will suffer “irreparable harm” if the stay remains in place. If the stay does not apply due to any of the above, then creditors can commence collection activities against a co-debtor

If a Chapter 7 bankruptcy is filed, only the debtor gets a stay of collection proceedings.  This means that a creditor is free to pursue collection against the co-signer.In other words, you will get "stuck" paying this debt if it is discharged.

M.D., Member, California and New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

What happens to a co-debtor when a debtor files for bankruptcy depends upon the type of bankruptcy that is filed. 

In a Chapter 13, the co-debtor, as well as the debtor, receives what is known as an "automatic stay". This means that for the term of the bankruptcy no collection action can be taken against them. The reason the stay extends to the co-debtor is that the debtor will be paying the debt through the Chapter 13 plan.

However the co-debtor stay only applies to consumer debts. So if the co-debtor signed for a business debt the stay does not apply. Additionally, the stay also ends if the Chapter 13 case is dismissed or if the case is converted to a Chapter 7. Finally the co-debtor stay may also be lifted if one of the following things can be shown by the creditor that: the Chapter 13 plan does not provide for full payment of the debt; or the creditor will suffer “irreparable harm” if the stay remains in place. If the stay does not apply due to any of the above, then creditors can commence collection activities against a co-debtor

If a Chapter 7 bankruptcy is filed, only the debtor gets a stay of collection proceedings.  This means that a creditor is free to pursue collection against the co-signer.In other words, you will get "stuck" paying this debt if it is discharged.


IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although AttorneyPages.com has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

Get Legal Help Today

Find the right lawyer for your legal issue.

 Secured with SHA-256 Encryption