In some cases, in order to have a loan approved, you will need a co-signer. This is a person who will agree to be responsible for your debt if you are unable to pay. When you file for bankruptcy, you are concerned with what will happen to the co-signer. Will the creditor sue in order to obtain the money owed?
A Chapter 7 bankruptcy is an elimination of debts. Except in very rare occasions, a Chapter 7 bankruptcy eliminates the filer’s unsecured debts and nothing is owed to the creditors. However, a co-signer or co-debtor is not afforded that same protection and the creditors can go after them for the debt. Under a Chapter 7 bankruptcy, the creditor may be able to act against the co-signer immediately, depending on the terms of the loan agreement.
A Chapter 13 bankruptcy is a reorganization, where you agree to repay your creditors a certain amount during a certain time period. If you file a Chapter 13 bankruptcy, your co-signer is afforded protection from the Co-signer Stay. This means that the creditors cannot attempt to collect on the debt from either your or your co-signer once you have filed for bankruptcy. Only individuals are afforded Chapter 13 stay protection. Any business that acts as a co-signer is excluded.
While this protection is in effect so long as your bankruptcy case is before the court, a creditor may seek a court order to obtain relief from the stay. This means that they are hoping to be allowed to continue to get their debt paid by your co-signer.
Whether or not you as the co-signer will be liable for the debt incurred by the person declaring bankruptcy depends on what that person chooses to do. They may choose to pay the entire debt, and the creditor is paid in full. However, the debtor may negotiate a payment for a certain portion of the debt under a Chapter 13 filing, at which time the creditor will look to the co-signer to pay the rest of the debt. Under a Chapter 13 bankruptcy, the creditor may pursue the co-signer if the payment plan proposed under the bankruptcy will not satisfy the entire amount of the debt.
A Chapter 13 co-debtor stay applies only to specific types of debt, such as a consumer debt. For example, the debt may be a loan for a car, credit card debts, medical bills and personal loans. Debts incurred for professional services and those that are taxes are not considered consumer debts and will not be covered under the co-signer stay.
The most important thing to understand is that the automatic co-signer stay is in effect only so long as the case in the court. If your Chapter 13 bankruptcy case is resolved and closed or dismissed or even reassigned as a different type of bankruptcy, then the creditors are able to attempt to obtain repayment of their debts from the co-signer.
Call our Nebraska bankruptcy attorneys at 308-872-8327 for a free consultation.