When you co-sign a loan, both parties are responsible for the debt. In fact, it is just like taking out the loan yourself. It will appear on your credit report. This can become a serious problem if the party you co-signed for files for bankruptcy, since it does not cancel the creditor’s rights against the co-signer.
In addition, if someone co-signed a loan on your behalf, it can be an essential part of the decision-making process when choosing between Chapter 7 and Chapter 13 bankruptcy in Indiana.
Chapter 7 bankruptcy will not protect a co-signer
Chapter 7 bankruptcy can relieve an individual debtor from many types of unsecured debt. These can include certain types of credit card balances, personal loans, and medical bills. Normally, the discharge prevents creditors from taking further action to recover those unsecured debts from the individual who filed for bankruptcy.
The discharge, however, applies only to you, the individual who filed for bankruptcy. This means that if another person co-signed a loan, that individual is still responsible for the debt.
Indeed, the U.S. Bankruptcy Court for the Southern District of Indiana does not provide the co-debtor with an automatic stay in Chapter 7.
For instance, assume a parent co-signed a $10,000 loan for their adult child. If the child files for Chapter 7 bankruptcy and the debt is discharged, the lender cannot pursue repayment from them. On the other hand, the lender can seek repayment from the co-signer/parent.
Chapter 13 offers additional protection
The same is not the case with Chapter 13 bankruptcy. Chapter 13 proceedings typically establish what is commonly referred to as the co-debtor stay for consumer debts according to Section 1301 of the Bankruptcy Code. The stay prevents creditors from suing a liable party together with the individual who is filing for bankruptcy as long as the stay is in place.
Consumer debts generally apply to those acquired for consumption. In that case, the co-debtor stay can offer some relief to the individual who co-signed the loan. However, this protection is not guaranteed.
In some situations, a creditor may seek relief from the stay at the bankruptcy court. This may be allowed by the court when the Chapter 13 repayment plan does not account for any payments to the creditor’s claim and when the beneficiary of the debt is the co-debtor and not the bankrupt party.
What happens after bankruptcy?
The filing of bankruptcy itself will not necessarily result in a discharge of a co-signer’s responsibility to pay the debt. In other words, the co-signer’s fate rests largely on the type of bankruptcy filed, how the debt is treated, and whether the creditor is paid in full.
In particular, people considering bankruptcy should keep in mind that the co-signer issue becomes especially important when the co-signer is a spouse, parent, or sibling.
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Chris Arrington represents the interests of Indiana residents who need to file for bankruptcy. Call our office today to schedule an appointment, and we can begin preparing your case right away.