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How Does Filing for Bankruptcy Affect a Cosigner?

Pytte Law Nov. 2, 2023

Filing for bankruptcy offers many benefits, the most obvious of which is that you could be cleared of all or most of your debts. However, it is important to understand the risks and the unintended consequences of filing for bankruptcy, one of which is its potential impact on co-signers.  

Co-signers may be left responsible for your debt after you file for bankruptcy, which may not be something you want to happen since the co-signer may be your family member or close friend. Bankruptcy may release your obligation to repay your debt, but it typically does not affect the co-signer’s obligation to pay back the debt.  

At Pytte Law, I have been helping people in Georgia file for bankruptcy for more than 25 years. Whether you are a debtor who wants to protect a co-signer when filing for bankruptcy or a co-signer seeking protection from debt collection, I can explain the options available to you. I have two offices in Georgia, in Savannah and Hinesville, but serve clients throughout the cities of Statesboro, Richmond Hill, Ludowici, and the counties of Long, Liberty, Bryan, Chatham, and Effingham.   

What Is a Co-Signer?  

A co-signer is an individual who voluntarily signs an agreement to guarantee the payment of a loan if the primary borrower is unable to. Essentially, a co-signer is a co-borrower, and creditors treat them as such when collecting debt. When a co-signer signs jointly with the primary borrower for a loan, the lending creditor has the equal right to collect debt from both the primary borrower and the co-signer.  

Effects of Bankruptcy on the Co-Signer  

The effect of bankruptcy on the co-signer depends on the chapter under which the debtor files for bankruptcy: 

  • Chapter 7 bankruptcy. This type of bankruptcy is designed to provide a fresh start to the filer by discharging all of his/her unsecured debt at the expense of liquidating (selling) their non-exempt assets. Essentially, it means that the filer no longer has an obligation to pay the creditors for the discharged debts. In fact, by filing for bankruptcy, the filer can enjoy the automatic stay, which prohibits creditors from trying to collect debt or even contacting the filer about the debt. However, none of this applies to the co-signer. In other words, even if the filer’s obligation to repay the debt is eliminated, your co-signer will still be on the hook for the payment of the discharged debt. Additionally, the co-signer will still be subject to the creditor’s collection efforts even after the primary borrower files for bankruptcy and the automatic stay goes into effect. This could potentially mean filing a lawsuit, obtaining a judgment, garnishing wages, seizing assets, and placing judgment liens on property, among other unpleasant consequences.  

  • Chapter 13 bankruptcy. By contrast, Chapter 13 bankruptcy does not have such a detrimental effect on the co-signer because the filer proposes a plan to repay the debt over a period of three to five years. As long as the filer completes their repayment plan under Chapter 13 bankruptcy, the creditor will not be able to collect debts from the filer or their co-signers/co-borrowers because of the codebtor stay. The codebtor stay, however, has its limitations.  

According to the American Bankruptcy Institute, the co-debtor stay in Chapter 13 bankruptcy only applies to consumer debt. The creditor may also be able to ask the court to lift the co-debtor stay if they can prove that (a) their interests are harmed irreparably by the co-debtor stay, (b) the co-signer received the benefit of the loan, or (c) the filer’s repayment plan does not cover the payment of the co-signed debt.  

Choose Pytte Law for Legal Assistance  

Because a co-signer is usually someone you have a close personal relationship with, you need to understand how filing for bankruptcy can affect them. As a bankruptcy attorney at Pytte Law, I can review your unique situation and explain how your bankruptcy filing may impact your co-signers and how you can protect them when you file. Reach out to my office today to request a free case evaluation.