Crucial Question: Can I Protect a Co-Signer Even in a Chapter 7 “Straight Bankruptcy”?

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Sometimes you don’t need the extra help of the Chapter 13 “co-debtor” stay to protect your co-signer from your debt problems.

 

Concerns about Bankruptcy Hurting Your Co-Signer

If you are considering bankruptcy you may be reluctant to file because of the impact you fear it will have on a co-signer or anyone else jointly obligated with you on a debt. That’s an honorable concern. You don’t want to hurt someone who has helped you.

However, the practical reality is that in many situations the best way to not hurt a co-signer is to file bankruptcy so that you will be able to focus your financial resources on paying either the co-signed debt or your co-signer directly.

But to get there, let’s look more closely at your concerns about your bankruptcy potentially hurting a co-signer, focusing on situations in which a Chapter 7 case would alleviate those concerns. In our next blog we’ll look at how a Chapter 13 case would deal with those concerns in different situations.

The Two Specific Concerns for Your Co-Signer

You likely want to protect your co-signer from having to pay the co-signed debt, and possibly also to protect the co-signer’s credit record.

Avoiding Your Co-Signer Being Forced to Pay the Debt

At the beginning we mentioned that you filing bankruptcy may be the best thing for your co-signer. That’s if you are willing and able to make the full payments on the co-signed debt, as a consequence of “discharging” (legally writing off) your other debts through your Chapter 7 case.

Even though a Chapter 7 case would very likely discharge your legal obligation to pay the creditor on the co-signed debt, bankruptcy law clearly permits you to nevertheless pay that creditor if you want to. So, filing a Chapter 7 case so that you can afford to keep up the payments on the co-signed debt can be a straightforward way to prevent your co-signer from having to pay that debt.

When you meet with your attorney to review your options he or she will help you prepare a monthly budget, and will inform you about the debts that will likely be discharged and those that you will likely need to and/or want to continue paying (your mortgage, vehicle loan, recent income taxes, and such). From this you and your attorney will be able to make a good estimate about whether you would be able to reliably maintain the payments on a co-signed debt.

Protecting Your Co-Signer’s Credit Record

If you have yet fallen behind in your payments on the co-signed debt, and if a Chapter 7 filing would enable you to keep up on those payments, you could likely succeed in preventing any adverse effect on your co-signer’s credit record.

If there has already been some adverse effect on your co-signer’s credit record because of your late payments, what’s happened in the past cannot be undone. But you can focus on preventing any further bad hits on your co-signer’s credit record by quickly catching up on the back payments and keeping current going forward.

Look closely at your budget, again with the help of your attorney, to determine if you can realistically come up with the catch-up money. If not, but you are in good relations with your co-signer, and can communicate with your co-signer about what you are doing to try to protect him or her, consider asking him or her to pay the amount needed to catch up, for the good of his or her credit record, in return for your renewed commitment to make the regular payments until the debt is paid off. (But see the caution below.)

Be Cautious about Making New Promises to Your Co-Signer

Before filing bankruptcy you likely have legal obligations to the creditor on the co-signed debt to pay that debt, and also to your co-signer for you to pay that debt so that he or she does not need to. Both those obligations—to the creditor and to your co-signer—will likely be discharged in your Chapter 7 case. If you nevertheless decide to continue paying the debt to the creditor to protect your co-signer, you are doing so to fulfill a moral duty not a legal one. Unless you go through a special formality called a reaffirmation agreement—which is highly unlikely—you will not be legally obligated to keep paying that co-signed debt. If you stopped paying it, most likely neither the creditor nor your co-signer would have any legal recourse against you.

But be careful. Discuss the situation thoroughly with your attorney so that you are clear what your legal obligations are, and so that you do not create an unnecessary and/or unintended legal obligation for yourself.