Bankruptcy and Co-Debtors & Co-Signors: What Happens When One Files?
The relationship between your bankruptcy and co-debtors is a delicate one with both positive and negative impact upon those who have co-signed for your loans, or for whom you have co-signed a loan.
Bankruptcy and Co-Debtors: Their Credit Reports
The first question is easy: your bankruptcy will have no direct impact upon your co-debtors’ credit reports. Your bankruptcy is your bankruptcy alone; it is reported to the Credit Bureaus in association with your Social Security Number alone. Simply because you file for Chapter 7 or Chapter 13 bankruptcy does not mean that your co-debtors will suffer any negative credit reporting.
Not directly, at any rate. The co-debtor will be required to maintain payments on the co-signed debt after your bankruptcy in order to maintain positive credit reporting with regard to the co-signed debt after your bankruptcy discharges it, unless you yourself continue to voluntarily repay the debt after your bankruptcy has discharged it.
Bankruptcy and Co-Debtors: Their Liability
The reason that your co-debtors do suffer that indirect effect is due to the basic effect that a bankruptcy has upon your own liability: it eliminates it. After your Chapter 7 or Chapter 13, you will, in most cases, have no remaining legal obligation to repay any discharged debt.
That does not, however, mean that no one has an obligation to repay it. If you have a co-signor or co-debtor on a particular debt who did file for bankruptcy or who is not jointly filing bankruptcy with you (that is, your spouse), that person will remain liable for the debt. This is because any sort of extension of credit is always premised upon a contract in which one party offers to lend money or extend credit, while the other party or parties promises to repay it. A bankruptcy nullifies that contract for the person filing the bankruptcy. Any other person who is party to the contract, however, is still bound by its terms. Even if they were “only a co-signor.”
Bankruptcy and Co-Debtors: Chapter 13 Bankruptcy and the Co-Debtor Stay
In Chapter 13 bankruptcy, however, there is some temporary protection for the co-debtor who remains liable for payment or collection called the “Co-Debtor Stay Against Collections.”
In both Chapter 7 and Chapter 13 bankruptcy, the moment the bankruptcy is filed, a sort of master injunction under Federal law prohibiting any creditor from engaging in any action that constitutes the collection of a debt. This includes phone-calls, letters or bills or other mailings, lawsuits, garnishments, foreclosures, the perfection of liens, and other actions.
In a Chapter 7 bankruptcy, this “automatic stay” extends only to the person or persons filing the bankruptcy. However, in Chapter 13 bankruptcy, the automatic stay extends additionally to co-debtors who are individuals co-liable for consumer debts. That is, the co-debtor must be a person and not a corporation or other non-human entity, and the debt must be not be a non-consumer tax or business or other such debt. As the Chapter 13 bankruptcy is essentially a “payment plan” bankruptcy in which the filing debtor repays some of what he or she owes to creditors over 3-5 years, this means that the co-debtor may be protected from any harassment for that entire period of time.
Once the Chapter 13 is completed, the person filing the bankruptcy will have any balance not yet repaid discharged, and the co-debtor is then left liable only for the reamining unpaid balance. In some Chapter 13 bankruptcies, this can be very little.
If the co-debtor is an individual that you would not want to be pursued for the co-signed debt, a Chapter 13 bankruptcy may be the best form of bankruptcy for you, in order to provide your co-debtors the most effective protection from collection, even while you do what you need to do in order to get the fresh start you need.
Discuss Your Bankruptcy and Co-Debtors with The Hilla Law Firm PLLC
The fact that you may have co-debtors you are concerned about should not stop you from investigating the possibility of a Chapter 7 or Chapter 13 bankruptcy providing you the frest start you both need and deserve.
The Hilla Law Firm, PLLC is a Michigan bankruptcy law firm specializing in helping people forward toward a new beginning. We will meet with you to discuss your particular situation and your desired outcome to determine whether a Chapter 7 or Chapter 13 bankruptcy is the right course of action for you.
If you are a Michigan resident, call us at (866) 674-2317 or click the button below to schedule a meeting with our Michigan bankruptcy attorney.