January 13, 2025
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- Bankruptcy
How does bankruptcy affect co-signers? If you’re in financial difficulty and you’re struggling to repay co-signed debts, you may need to consider this question.
In Alabama, as in other states, the implications of bankruptcy for co-signers can be significant, though the specific consequences vary widely depending on individual circumstances. This blog post will delve deeper into these nuances and help you to understand how considerations about your co-signers should influence decisions around Chapter 7 or Chapter 13 bankruptcy.
What Is a Co-Signer?
A co-signer legally agrees to repay a loan if the primary borrower fails to make payments. This is often necessary in situations where lenders are uncertain about borrowers’ ability to make consistent loan repayments under a given set of circumstances. The co-signer’s involvement makes it easier for the borrower to secure credit.
Of course, when things go wrong with a co-signed loan, this can cause trouble for the co-signer. Depending on the situation, a co-signer may have to deal with:
- Full responsibility for the loan
- Collection efforts or legal action
- A reduced credit score
- Difficulty obtaining future credit.
Differences for Co-Signers in Chapter 7 and 13 Bankruptcy
There are many different types of bankruptcy under U.S. law, but Chapter 7 and Chapter 13 bankruptcy are the most relevant to people struggling with consumer debt.
Chapter 7 bankruptcy, often referred to as liquidation bankruptcy, involves the sale of your non-exempt assets by a bankruptcy trustee. The proceeds are used to pay off your creditors, and most of your remaining unsecured debts are discharged. This type of bankruptcy does not involve a repayment scheme.
Chapter 13 bankruptcy, known as a wage earner’s plan, allows you to use your regular income to pay off your debts over time, typically three to five years. There is no need for asset liquidation under Chapter 13 bankruptcy.
Chapter 7 Bankruptcy and Co-Signers
Bankruptcy filings under Chapter 7 do not involve any protections for co-signers. The automatic stay provision (which bars creditors from making debt collection attempts from primary borrowers after you file for bankruptcy) does not apply to co-signers under the terms of Chapter 7. So, you won’t have to deal with your creditors after you successfully submit a filing, but your co-signer might.
Chapter 13 Bankruptcy and Co-Signers
Unlike Chapter 7, the automatic stay provision under Chapter 13 bankruptcy does extend to co-signers. So, once the repayment plan begins, your creditors will not be legally permitted to pursue your co-signers for repayment of some types of debts.
However, creditors can apply to have the automatic stay lifted. A court might agree to this if, for example:
- The full amount of the debt will not be repaid under the terms of the repayment plan
- A creditor is likely to suffer serious financial harm due to the application of the stay provision
- The primary borrower fails to keep up with repayments.
Special Considerations for Co-Signed Student Loans
Student loans often involve co-signers. Unfortunately, guarantors remain on the hook for the repayment of student loans when the primary borrowers file for bankruptcy.
Most unsecured loans (loans that aren’t tied to a valuable asset, such as a house or car) are discharged automatically in bankruptcy, but not student loans. To have a student loan discharged, you must bring a special “complaint to determine dischargeability” as part of your bankruptcy filing. This means you must convince the court that the repayment of your student loans would subject you to “undue hardship for the foreseeable future.”
It’s important to note that a bankruptcy filing involving a student loan will not affect the credit score of any co-signers to the debt. Credit reporting agencies generally do not take these into account when compiling reports and scores. Other debts will impact co-signers’ credit scores.
Bankruptcy Can Affect the Co-Signer’s Credit Score
Credit scores are based on your history of borrowing and repaying money; banks and other lenders use them as a means of deciding whether to lend money in given situations, alongside other factors. The higher your score, the better your chances of securing credit.
Filing for bankruptcy can have a lasting impact not just on your credit score, but also on that of your co-signer. So, they may have more difficulty securing a loan in the future.
Protections for Co-Signers
There are steps you can take to protect your co-signers and steps co-signers can take to protect themselves.
Some people choose to continue paying discharged debts after a Chapter 7 filing in order to protect co-signers. The successful filing means there is no legal obligation to do so, but paying down the remaining amount may allow your co-signer to escape collection attempts by creditors.
Another option is to reaffirm a particular debt. This allows you to retain the debt attached to a particular piece of your property (such as your house or car) post-bankruptcy. So, you could elect to remain responsible for a loan you used a co-signer to take out. You should note, though, that the state of Alabama has a unique system when it comes to granting exemptions, so you’ll need to ask your lawyer whether this is an option for you.
If you’ve co-signed on a loan and you’re worried about the impact the primary borrower’s bankruptcy filing might have on you, you should seek legal advice without delay. Contact us to schedule a free initial consultation about your case.
If you are contemplating bankruptcy, your co-signer may be able to help. For instance, while your credit was not worthy, your co-signer might be able to refinance the associated debt, thereby preserving their own credit if you file. To avoid the negative impact, this option must be exercised prior to the filing of the contemplated bankruptcy petition.
Work With a Bankruptcy Lawyer Who Will Fight for Your Rights
If you’re considering filing for bankruptcy, it’s important to understand how complex and challenging the process can be. Consulting with a lawyer who specializes in the area will help you to find your footing and ensure you don’t make any potentially costly mistakes.
Facing bankruptcy can be intimidating, but it doesn’t have to lead to financial ruin. In fact, for many people, filing for bankruptcy is the first step on the road to a happy and stable future.
Contact us today to schedule a free initial consultation. You can reach us via the form on our website or over the phone at 334-260-0500.