What Happens to Co-Signers When You File for Bankruptcy?
Filing for bankruptcy can offer relief if you are dealing with overwhelming debt. It can provide you with an opportunity to start afresh. However, if you have co-signers, you should keep in mind that your decision to file for bankruptcy could affect them. Co-signers who agree to take responsibility for a loan if the borrower fails to pay could face financial consequences if the borrower files for bankruptcy. Debtors can pursue co-signers if borrowers file for bankruptcy. However, if you file for bankruptcy, there are ways to protect your co-signers. Read on to learn more about what happens to co-signers when you file for bankruptcy.
Who Is a Co-Signer, and When Are They Required?
A co-signer is somebody who agrees to be responsible for paying off a loan if the primary borrower refuses or fails to do so. A co-signer generally guarantees that a loan will be repaid. This means that if the primary borrower does not make payments, the lender can pursue the co-signer to recover the money. Usually, co-signers are family members, friends, or business partners who trust that the primary borrower will repay the loan.
A lender may require a co-signer for several reasons, including the following;
- You have limited credit history or poor credit
- You have insufficient income or employment history
- You don’t have collateral to put up to secure the loan
- You already have significant debt compared to your income
- The loan carries more inherent risk for the lender
- You are a first-time borrower
- You are applying for a large loan
What Happens to Co-Signers When You File for Bankruptcy?
If a borrower fails or refuses to repay a loan, their co-signer could face financial turmoil. Creditors can pursue co-signers if borrowers file for bankruptcy. However, whether a creditor can pursue your co-signer after you file for bankruptcy depends on which chapter of bankruptcy you file. There are two types of bankruptcies that individuals can file: Chapter 7 and Chapter 13. Chapter 7 allows you to discharge your qualifying debts, while Chapter 13 requires that you restructure your debts into a manageable repayment plan.
After you file for Chapter 7 bankruptcy, the automatic stay will go into effect, preventing creditors from pursuing you. However, the automatic stay will not extend to your co-signer, meaning creditors can pursue your co-signer while you are in bankruptcy proceedings. Even if you discharge the debt, your co-signer will remain responsible for it. Fortunately, there are steps you can take to protect your co-signers. The following are your options;
- Reaffirm the debt: Reaffirming a debt means you agree to continue paying a specific debt despite filing for bankruptcy.
- Pay off the debt: This entails voluntarily paying off the debt after the bankruptcy.
Chapter 13 bankruptcy offers more protection to co-signers. When you file for Chapter 13 bankruptcy, your co-signers will benefit from the protection of the automatic stay. However, it is vital to note that the court can lift the automatic stay under certain circumstances. Also, the codebtor stay ends if your case is dismissed or you convert your case to Chapter 7 bankruptcy.
Contact Our Deerfield Beach Bankruptcy Attorney
For legal help, contact our Deerfield Beach bankruptcy attorney at the Law Office of Adam I. Skolnik, P.A.
