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Cosigner Protection Under Chapter 13 Bankruptcy

If you are planning on filing for bankruptcy, but you have a cosigner on one or more loans, you should consider how your bankruptcy will affect them. A cosigner may be required for certain loans when a bank thinks you will not be able to get one on your own, either because you don’t have sufficient income, assets, or credit scores to be approved for a traditional loan. If you default on your loan, a creditor can go after your cosigner to pay the balance owed.

In some bankruptcy situations, you are cleared from owing any debt, but it may not clear your cosigner. If you received a discharge through Chapter 7 bankruptcy, your creditors may pursue your cosigners for payment. In fact, after you file for bankruptcy and are awarded an automatic stay, your creditors will likely start contact your cosigners right away since they are prevented from contacting you at that point.

In order to receive a bankruptcy discharge while remaining on good terms with your cosigners, you might want to file for Chapter 13 bankruptcy. In Chapter 13, you are put on a payment plan for three to five years, allowing you to pay off most or all of your debts more affordably. You make payments to your bankruptcy trustee, who in turn takes your payment and disburses it among all the debts you owe. What’s more, once you file for Chapter 13, a codebtor stay goes into effect, protecting your cosigners from being sought out for payment by your creditors. The codebtor stay is effective only for consumer loans (like for a car), so if you have a cosigner on a business loan the stay does not apply.

It’s important to note that a creditor may petition the bankruptcy court to lift the codebtor stay, especially if one or more of the following conditions applies:

  • Your cosigner is the one who actually received the consideration for debt owed.
  • Your Chapter 13 payment plan does not propose paying off the debt in full.
  • The creditor will suffer irreparable harm if the codebtor stay is not lifted.

Additionally, the stay is automatically lifted if your Chapter 13 bankruptcy is dismissed or converted into Chapter 7.

Worried about how your bankruptcy will affect your cosigners? We can answer your questions.

Wanting to file for bankruptcy without hurting the good people who backed you on your consumer loans is a precarious position. A skilled bankruptcy attorney can answer your questions about your situation and make sure you’re aware of every solution that could potentially work for you. Contact the Cleveland, Ohio bankruptcy lawyers of Luftman, Heck & Associates for a free consultation at (216) 586-6600 or by email at advice@clevelandbankruptcyattorney.com.