What Happens To Co-Signed Debt In Bankruptcy Cases?

In both Chapter 7 and Chapter 13 bankruptcy cases, co-signed debts are treated differently depending on the type of bankruptcy and the specific circumstances of the debt. Here’s a breakdown of what typically happens to co-signed debts in each chapter:

Chapter 7 Bankruptcy:

1. Co-Signer Liability: In Chapter 7 bankruptcy, the primary debtor’s obligation to repay the debt is discharged, relieving them of personal liability for the debt. However, the discharge does not extend to the co-signer. As a result, the creditor can still pursue the co-signer for the full amount of the debt.
2. Creditor’s Actions: After the primary debtor’s discharge, creditors often turn their attention to the co-signer for repayment. The creditor has the legal right to pursue collection actions against the co-signer, including lawsuits, wage garnishment, and asset seizure.
3. Co-Signer Protection: If the co-signer is unable to repay the debt and faces financial hardship, they may consider filing for bankruptcy themselves to seek relief from their obligations. Alternatively, they may negotiate with the creditor to settle the debt or arrange a payment plan.

Chapter 13 Bankruptcy:

1. Co-Signer Stay: In Chapter 13 bankruptcy, the automatic stay applies to co-signed debts, preventing creditors from taking collection actions against the co-signer while the bankruptcy case is active. This provides temporary relief to the co-signer during the repayment plan period.
2. Repayment Plan: In Chapter 13 bankruptcy, the primary debtor proposes a repayment plan to the court, outlining how they intend to repay their debts over a three to five-year period. Co-signed debts are typically included in the repayment plan, and the co-signer is protected from creditor actions as long as the debtor adheres to the plan.
3. Discharge of Co-Signed Debt: At the conclusion of the Chapter 13 repayment plan, any remaining balance on co-signed debts may be discharged, relieving both the primary debtor and the co-signer of further liability for the debt. However, it’s essential to note that not all co-signed debts may be dischargeable, and specific criteria must be met for discharge eligibility.

Considerations for Co-Signers:

1. Communication with the Debtor: Co-signers should maintain open communication with the primary debtor throughout the bankruptcy process to stay informed about the status of the case and any developments regarding their shared debts.
2. Legal Counsel: Co-signers may benefit from seeking legal advice from a bankruptcy attorney to understand their rights and options regarding co-signed debts in bankruptcy.
3. Financial Planning: Co-signers should consider their financial situation and explore options for managing co-signed debts, such as negotiating with creditors or seeking debt relief through bankruptcy if necessary.

In summary, co-signed debts are treated differently in Chapter 7 and Chapter 13 bankruptcy cases, but both chapters offer potential options for addressing these obligations. Co-signers should be aware of their rights and responsibilities and consider seeking professional advice to navigate the complexities of bankruptcy and debt management.

Co-Signed Debt