Your Credit Report & Their Liability
Your bankruptcy is your own bankruptcy and not anyone else’s. Thus, your bankruptcy will not affect the credit of any co-signers you may have (see our Bankruptcy Myths page for more about co-signers and credit). But neither does your bankruptcy discharge your co-debtors’ liability for the joint debt—only your own
With one important exception.
Co-Signers and Your Bankruptcy: Joint & Several Liability
First, it is important to understand a basic principle of contract law: the concept of “joint and several” liability. What “joint and several” liability means is that each person who is responsible for a liability, whether by way of a jointly or co-signed contract or, in tort law, a harm mutually accomplished and a lawsuit damage award afterward, is responsible for 100% of it.
That is, if two people co-sign a loan agreement, which is a contract after all, they do not each have 50% of the resulting debt obligation: they each have 100% of the obligation. Thus, if one of the two signing persons files for bankruptcy or dies or disappears to Timbuktu, the other person will be left holding the bag, as it were.
The exception is a Chapter 13 bankruptcy in which a significant portion of the debt is paid through the Chapter 13 payment plan.
Co-Signers in Bankruptcy: Chapter 13 Debt Repayment
In a nutshell, however, in a Chapter 13 bankruptcy, you pay back some of what you owe over a period of 3-5 years through the Bankruptcy Court (not directly to the creditors). You pay whatever, in theory, you can afford to pay based on your necessary household expenses and monthly household income. So, if over 3-5 years, you can only afford to pay, for example, 10% of your total debt, you do so—and then the remaining 90% balance is totally discharged the same way it would have been in a Chapter 7 bankruptcy. Read more about the Chapter 13 payment plan here.
While you are in a Chapter 13 bankruptcy, individual co-debtors for consumer debts are protected by the “automatic stay against collections” the same way that you are. Creditors cannot harass them for collection for the entire 3-5 year period.
Afterward, when the Bankruptcy Court distributes your payment to the creditors, there will, obviously, be a little (or even a lot!) less of it for your co-signers to be liable for. They will still be responsible alone for whatever does remain of the debt after the Chapter 13 bankruptcy, but, in some cases, a Chapter 13 bankruptcy will pay off the majority or even all of a debt, although so-called “100%” Chapter 13 Plans, in which the full amount of the debt is paid through the plan, are the minority of Chapter 13 cases.
Are My Co-Signers Affected by My Bankruptcy: The Bottom Line
Thus, if you have co-signers or co-debtors that you want to protect but you still require relief from your overall debt and from creditor harassment, it may be that, regardless of your eligibility for Chapter 7 bankruptcy, a Chapter 13 bankruptcy may be the right form for you. An experienced Michigan bankruptcy attorney will be able to advise you of your best option.
If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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