When you file for Chapter 13 bankruptcy, it may be the case that you are, alone, solely liable for each and every one of your debts.
Or it may be the case that you have one or more co-signers attached to your debt.
What is a co-signer?
A co-signer, or co-debtor, can be anyone who signs a credit application for you, co-signs a loan with you, or who helps you to finance a car loan or a home mortgage with superior income, employment, or credit history. (Or, in the case of car loan, possibly a valid driver’s license.)
In other words, a person normally has a co-signer when the credit history or score is less than stellar or when income is less than stable.
If you don’t pay the co-signed debt, the co-signer will become liable for the full unpaid balance.
What happens to the co-debtor when further financial hardship hits, and you decide to file for Chapter 13 bankruptcy?
It is worth noting up front that a Chapter 13 bankruptcy is a form of bankruptcy in which, over 3-5 years, at least a portion of the debt owed by a person, is repaid to his or her creditors.
It is not the form of bankruptcy in which a debt is discharged entirely without payment. That is a Chapter 7 bankruptcy.
Some might view the Chapter 13 requirement of repaying a portion of the debt owed as a negative aspect of that form of bankruptcy.
However, with regard to co-signers, that the balance of the debt for which they co-signed will generally be less after the debtor’s Chapter 13 discharge than it would with a Chapter 7 is actually a helpful aspect.
This is true because a Chapter 7 or Chapter 13 bankruptcy will discharge your personal liability for the co-signed debt—but not your co-debtor’s.
That said, when you file a Chapter 13 bankruptcy, your co-debtor—whether you want them to know about the bankruptcy filing or not—will receive a notice from the Bankruptcy Court informing them of the case’s filing.
Under penalty of perjury, you are required to list all debts owed and the names and addresses of any co-signers.
This may make for uncomfortable family dinner if you have not informed your co-signer (often a family member) of your intent to file a Chapter 13 bankruptcy ahead of time.
The up-side for the co-signer is that he or she will be protected from collections harassment for the entire 3-5-year duration of the Chapter 13 process.
Designing Chapter 13 Plans to Protect Co-Signers
There are, in addition, other steps that can be taken within the Chapter 13 bankruptcy process to protect your co-signers.
For example, if the co-signed debt is a car loan, your bankruptcy attorney may be able to design a Chapter 13 payment plan that allows you to make your monthly auto loan installment payments directly to the loan servicer, outside of the payment plan.
Alternatively, if the car loan must be paid through the Chapter 13 payment plan, it could be paid in full at the contractual rate of interest, without cramming down the principal owed to the car’s (possibly low) value or modifying the interest rate.
While modifying a car or other secured loan in this fashion is permissible (and frequently desirable) in a Chapter 13 plan, such maneuvers will leave a co-signer holding some level of liability for the debt after the Chapter 13 is concluded.
Simply using the Chapter 13 to pay what is owed per contract and possibly to catch up any delinquent payments will protect the co-signer and the debtor at the same time.
Co-Signers and Chapter 13: The Bottom Line
In conclusion, you must be mindful of the fact that, when you file a Chapter 13 bankruptcy, there could be negative outcomes for any co-signers you may want to protect.
The best course of action is to make sure to mention this priority to your bankruptcy attorney the first time that you meet, so that your interest in protecting a friend, spouse, or family member becomes part of the conversation with your attorney from the get-go.
If you are considering filing for Chapter 13 bankruptcy, call us to discuss your options.