01 May Which Bankruptcy Chapter Is Best For A Co-Signer?
A common concern that potential clients have is what will happen to a co-debtor if the client decides to file for bankruptcy. Most often the issue comes up when a friend or family member has co-signed for a car for the client, and the client has gotten behind on payments.
The potential debtor is usually embarrassed that they couldn’t make the car note, and doesn’t want the friend or relative to have to pay the note.
The answer to this question depends on whether a Chapter 7 or a Chapter 13 is going to be filed.
When either a 7 or a 13 is filed, the debtor receives an automatic stay from all collection proceedings. The automatic stay prevents creditors from continuing collection proceedings, and in particular here, will stop a creditor from taking any further action to repossess a vehicle.
Fora more detailed discussion of the automatic stay, its effect, and exceptions, you might want to read: “Wait! Stop! I Filed Bankruptcy (again)”
Unfortunately, Chapter 7 does not give a co-debtor any protection from having to pay the debt for which he co-signed.
However, Chapter 13 does allow for a co-debtor stay.
The Bankruptcy Code recognizes that a debtor that has had someone co-sign for a loan is going to be under pressure, either real or imagined, by the friend and relatives to pay the debt.
Also, the co-debtor stay also means a creditor can’t use the relationship between the debtor and co-signer as a way to pressure the debtor to pay the debt.
The co-debtor stay remains in effectuntil the Chapter 13 case is closed, dismissed, or converted to Chapter 7.
The co-debtor stay can be a major consideration when deciding which type of bankruptcy is best.
Consult with an experienced bankruptcy attorney to discuss what options are best for you.
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