Co-Signer Liability When Declaring Bankruptcy

Making the decision to file for bankruptcy is never an easy one. If you have a co-signer or guarantor on any of your debts, the situation can become even more complicated. It is important to understand how the decision to declare bankruptcy could affect your co-signers or guarantors.

Co-Signers May Be Liable for Debts

A co-signer or guarantor is an individual who has signed along with you as a fall back if you are unable to pay your debt. If your credit history is not acceptable to creditors, they may require a co-signer or guarantor before they accept you. There is a key difference between the two: a creditor may pursue a co-signer at any time for repayment of debt while a guarantor cannot be pursued until the creditor has attempted to collect from the primary borrower. When you declare bankruptcy, it only eliminates your obligation to pay any discharged debts. It does not eliminate your co-signer or guarantor’s obligation to pay the debt. Depending on the type of bankruptcy you file, however, it is possible that you could protect co-signers from collectors.

Can You Protect Your Co-Signers?

Chapter 7 bankruptcy places an automatic stay on all collection activities against you. It does not stay any collection activities for your co-signers or guarantors. There are options that you can take to protect your co-signers or guarantors, however. One way is to reaffirm your debt. Reaffirming a debt nulls the benefit of the debt discharge Chapter 7 gives you and makes you personally liable for the debt again. Thus, if you reaffirmed the debt your co-signer or guarantor is responsible for, the collectors will not have to pursue them. Reaffirming debt, however, is not usually advised. Another option would be to pay off the debt for which a co-signer or guarantor is liable. Chapter 13 bankruptcy offers a wider range of protection for your cosigners and guarantors. Under Chapter 13, the collective stay extends to your co-signer or guarantor. Under some circumstances, a creditor may be able to argue for a lift in the stay. However, Chapter 13 generally offers much more protection as it gives you the opportunity to pay off cosigned or guaranteed debts through your bankruptcy repayment plan. For those facing bankruptcy, the future may look bleak. However, with the experienced legal advice of the bankruptcy lawyers at Oswalt Law Group in Arizona, you can begin to see a brighter, debt-free future. Call the Oswalt Law Group today to learn more about how their experience and legal services can help you with your bankruptcy case.