What Happens To A Co-Signor In A Chapter 7 Bankruptcy Case?

Several aspects of a non-filing co-signor are discussed below.  Please remember that every case is different and should be reviewed by an experienced bankruptcy attorney:

1. Discharge of Debt for the Debtor

In Chapter 7 bankruptcy, the primary debtor (the person who filed for bankruptcy) seeks to discharge their debts, meaning they are released from personal liability for specific types of debts. However, the discharge granted to the primary debtor does not absolve the co-signer from their responsibility. The bankruptcy discharge only applies to the debtor who filed for it, not to any co-signers.

2. Collection Efforts

Once the primary debtor’s Chapter 7 bankruptcy case is concluded and their debts are discharged, creditors are no longer able to pursue the primary debtor for repayment. However, the creditors retain the right to collect the remaining balance of the debt from the co-signer. The co-signer agreed to repay the debt if the primary borrower could not, and the bankruptcy discharge does not affect this agreement. As a result, creditors can demand full payment from the co-signer and may take legal actions if necessary.

3. Credit Impact

The financial repercussions for the co-signer can be significant. If the primary debtor’s bankruptcy leads to non-payment or default on the co-signed loan, these actions will likely be reported to the credit bureaus. Consequently, the co-signer’s credit report will reflect missed payments, defaults, or the fact that the debt was included in a bankruptcy case. This can lower the co-signer’s credit score and make it more challenging for them to obtain credit in the future.

4. Legal Actions

If the co-signer is unable to pay the debt, creditors can pursue various legal remedies to recover the owed amounts. These may include:

• Lawsuits: Creditors can sue the co-signer in court to obtain a judgment for the debt amount.
• Wage Garnishments: If the creditor wins a judgment, they may garnish the co-signer’s wages, which involves taking a portion of their paycheck directly.
• Liens: Creditors can place liens on the co-signer’s property, such as a house or car, which may lead to forced sales to recover the debt.

5. Possible Recourse for Co-signers

The co-signer might have some legal avenues to recover the payments made to creditors from the primary debtor. This recourse could include:

• Indemnification: If there is an indemnity agreement between the co-signer and the primary debtor, the co-signer might be able to claim reimbursement for the amounts paid.
• Legal Action: The co-signer could sue the primary debtor to recover the amounts paid. However, this is often challenging, especially if the primary debtor is already in a weakened financial state following bankruptcy.

Preventive Measures for Co-signers

To protect themselves, potential co-signers should consider the following before agreeing to co-sign a loan:

• Understand the Risk: Fully comprehend the obligations and potential risks involved in co-signing.
• Monitor Payments: Regularly check that the primary borrower is making timely payments.
• Communication: Maintain open communication with the primary borrower to stay informed about their financial situation.
• Legal Advice: Seek legal advice to understand their rights and obligations fully.

Co-signers should always weigh the potential benefits against the risks and ensure they are prepared for the financial responsibilities that come with co-signing a loan.

Co-Signed Debt