Modifying Co-Signed Secured Debt in Chapter 13 Bankruptcy? Be careful.

16 Oct Modifying Co-Signed Secured Debt in Chapter 13 Bankruptcy? Be careful.

Chapter 13 bankruptcy provides a powerful tool — You can provide for special treatment of co-signed debt, allowing it to be paid more than other similar creditors. In this way, you can “protect” your co-signer from having to repay part or all of the debt you incurred with their help.

But what happens when you owe a co-signed debt and it is secured by something, like a car? In that case, the creditor not only has a right to collect the debt from the car, if you fail to pay, but also from the co-signer. In other words, there are three places to go to get repaid.

In those situations, you have several options in a Chapter 13 wage earner plan.

  • Surrender: You could give up the car and provide that the creditor simply shares in the proceeds of the case like any other unsecured creditor. Your co-signer would ultimately be on the hook for any unpaid balance due on the original contract.
  • Protect: You could provide in your plan to repay the car loan in full, with the original contract’s interest rate. The creditor will be paid everything it is owed, and cannot collect from the co-signer then.
  • Surrender but protect: You could surrender the collateral to be sold but provide in your plan to repay the balance, if any, in full with the contract rate of interest.
  • Pay, but modify the loan: You could also provide in your plan to pay the car lender as though there was no co-signer. The interest rate would be changed to reflect what your court deems adequate protection for the lender, and they are repaid all of the secured claim (which may be all the principal or only part of it).

It is this last option that can be tricky. If you can’t afford to fully protect the co-signer in the plan by paying the debt in full, you need to be aware that ultimately the co-signer will owe part of this debt. They will owe whatever is not paid by your plan, but is still owed under the original contract.

The creditor may be prevented from trying to collect this while the case is going on — by the co-debtor stay — but they will be entitled to collect from the co-signer — because there is no “co-signer discharge” in Chapter 13.

So always be aware if you have a co-signed debt in your case, even if the creditor isn’t doing something now to collect, they may be able to go after your co-signer unless you can afford to repay the debt in full through your case.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com
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