01 Mar The Fate of Co-Signed or Guaranteed Debt in Bankruptcy
If any of your debts have been guaranteed or co-signed by a friend or relative, your bankruptcy filing could damage your friend or relative’s credit.
Lenders, whether automobile finance companies, credit card lenders, mortgage lenders or any other type of credit grantor, are in the business of evaluating and managing risk. If your credit profile has been poor for a while, you may have been asked by the credit grantor to find a guarantor or co-signer.
A co-signer refers to another person who is equally responsible with you for a debt. Co-signed loans or accounts may sometimes be called “joint” accounts.
A guarantor, by contrast, refers to a person who agrees to take responsibility for payment of a debt only if you default on your obligation. A guarantor’s liability is considered a “contingent liability” since the guarantor’s obligation only arises you default on payment.
As you might imagine, when you file a bankruptcy, your co-signer or guarantor will end up with financial consequences.
If you file Chapter 7, you will be protected against creditor action by the automatic stay, but your co-debtor or guarantor will not.
In Chapter 13 cases, your co-debtor or guarantor may be subject to several possible options:
- if the debt is a “consumer debt” then a “co-debtor stay” that prevents creditors from pursuing co-debtors or guarantors during the term of your Chapter 13 plan. However, when the plan is completed or dismissed, any unpaid balance will become immediately due and payable by the co-debtor/guarantor.
- if the debt is not consumer debt, then your guarantor/co-debtor is immediately at risk
- even if the creditor holds off on collection, your co-debtor or guarantor will see his credit rating take a hit because of the delay in payments.
- in some jurisdictions, you can propose a plan to protect your co-debtors by paying co-signed or guaranteed debts in full even if other debts are not paid in full. If the bankruptcy court in your jurisdiction allows these special classes, your co-signer will see damage to his credit.
Do not be tempted to pay down or have your co-signer/guarantor pay down co-signed debt prior to filing bankruptcy, at least not before speaking with bankruptcy counsel. Payment of one creditor to the exclusion of others may be an improper preference and the payment can be reversed.
Co-signed or guaranteed debt will make your bankruptcy case more complicated – make sure to discuss these issues with your lawyer prior to filing.
chapter 7 bankruptcy, 13 co-signed debt, guarantor, co-debtor stay
Jonathan Ginsberg, Esq.
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