When borrowers with limited income or poor credit have difficulty obtaining a loan, the lender will sometimes agree to make the loan if the loan is cosigned or guaranteed by another person. A person who cosigns a loan is equally responsible for making payments when they are due. In other words, if the loan is in default, the lender can pursue either the borrower or the cosigner, or both, for payment.
A person who guarantees a loan is responsible for paying the debt only if the borrower fails to pay it. A lender cannot pursue a guarantor for payment until the lender makes an unsuccessful attempt to collect the debt from the borrower. In addition to loans, cosigners and guarantors are sometimes used to obtain credit cards and leases.
Cosigners and guarantors are treated the same way in bankruptcy. The responsibility of a cosigner or guarantor for payment of your debt after you file bankruptcy depends upon the kind of bankruptcy you file.
Filing a chapter 7 bankruptcy will not protect your cosigners or guarantors. The automatic stay that goes into effect when you file your chapter 7 petition prevents your creditor from collecting the debt from you, but it does not affect the creditor’s right to seek payment from your cosigner or guarantor. A discharge of that debt under chapter 7 eliminates your obligation to pay the debt, but it does not affect the agreement that your cosigner or guarantor made to pay the debt.
Since filing a chapter 7 bankruptcy will relieve you of your responsibility to pay your other debts, filing a chapter 7 petition might free up enough income to allow you to pay the debt so that your cosigner or guarantor will not be stuck with it. You can do that by reaffirming the debt while your bankruptcy is pending, or by paying the debt voluntarily after your discharge is granted.
Assuming you can negotiate a reaffirmation of the debt with your lender, a reaffirmation might be the better approach if your loan agreement makes the entire debt payable upon your filing of bankruptcy. If your bankruptcy filing is not considered a default that makes the entire loan balance due and payable, you can ask your cosigner or guarantor to make payments until you receive your discharge and are in a position to make the payments voluntarily on your cosigner’s behalf.
A chapter 13 bankruptcy offers more protection for your cosigners and guarantors. The automatic stay that goes into effect when you file a chapter 13 petition includes a provision that is known as a “codebtor stay.” In most cases, the codebtor stay prevents your creditors from pursuing cosigners or guarantors to collect your debt. This gives you a chance to repay the debt through your chapter 13 plan. As long as you pay that debt in full by the time your chapter 13 discharge is granted, your cosigner or guarantor will continue to be protected from collection efforts.
There are limited exceptions to the protection offered by the chapter 13 codebtor stay.
- Debts that are not consumer debts (those that pertain to a business you operated) might not receive the protection of the codebtor stay.
- Debts involving loan proceeds that were received by your cosigner, rather than by you, might not be protected by the codebtor stay.
- If your chapter 13 plan does not propose to pay the debt in full, your cosigner or debtor might not receive the full protection of the codebtor stay.
- If your creditor can persuade the Bankruptcy Court that it will suffer irreparable harm as a result of the stay, it can seek relief from the stay.
You should consult your bankruptcy attorney to determine whether any of those exceptions apply in your case.
Bankruptcy is complex and many answers depend upon your specific situation. If you still have questions you can schedule a free consultation with a bankruptcy attorney.