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

When you file for Chapter 7 bankruptcy, it can have significant implications for any debts that you have co-signed with another person. Here’s what generally happens to co-signed debt in this situation:

Impact on the Primary Debtor

Filing for Chapter 7 bankruptcy can discharge your legal obligation to repay the co-signed debt, meaning you are no longer personally liable for the debt. However, this discharge only applies to you, not the co-signer.

Impact on the Co-signer

• Co-signer’s Liability: The co-signer remains fully liable for the debt. Since your legal obligation to repay the debt is discharged in bankruptcy, creditors can (and likely will) turn to the co-signer for payment. This means the co-signer will be responsible for making payments on the debt, regardless of your bankruptcy discharge.
• Credit Report and Score: The bankruptcy filing may appear on your credit report but should not appear on the co-signer’s credit report. However, if the debt becomes delinquent because it is not being paid (either by you or the co-signer), that delinquency will likely be reported on the co-signer’s credit report, potentially damaging their credit score.
• Collection Actions: Creditors can pursue collection actions against the co-signer, including calling them for payments, sending demand letters, reporting delinquencies to credit bureaus, or even filing a lawsuit, as they are now the primary party responsible for the debt.

Protecting the Co-signer

• Reaffirmation Agreement: You might choose to reaffirm the co-signed debt during your Chapter 7 bankruptcy process. A reaffirmation agreement is a legal document that excludes the debt from your bankruptcy discharge, meaning you voluntarily agree to remain liable for the debt as if you had not filed for bankruptcy. This can protect the co-signer from having to take on the full burden of the debt, but it also means you are legally obligated to continue making payments.
• Continue Making Payments: Even if you do not reaffirm the debt, you can still protect your co-signer by continuing to make payments on the co-signed debt. While you are not legally obligated to do so after the discharge, voluntarily making payments can prevent the creditor from seeking repayment from the co-signer.

Filing for Chapter 7 bankruptcy when you have co-signed debts requires careful consideration of the impact on your co-signers. While bankruptcy can provide you with relief from your debts, it does not absolve co-signers of their responsibility to repay. If maintaining a positive relationship with your co-signer is important to you, it’s crucial to communicate with them about your intention to file for bankruptcy and discuss how you plan to address the co-signed debt. Consulting with a bankruptcy attorney can also provide you with guidance on how to best protect your co-signer’s interests while pursuing bankruptcy relief.