Bankruptcy and Cosigners Liability
Posted on 25. Mar, 2009 by emmettjones in Bankruptcy
Because every situation is different, and certainly some are more complicated than others, not every bankruptcy is cut-and-dry. This post looks at the liability of the cosigner if the primary borrower files for bankruptcy.
Co-signers and Chapter 7 Bankruptcy
Chapter 7 debtors who file for, and complete their bankruptcy proceedings typically have all of their unsecured debts discharged. But what happens to the co-signer, on credit card debt, for example, who signed a contract saying that they would pay in the event that the initial borrower was unable to pay?
Simply put, they are now liable for the debt.
The contract initially signed by the co-signer stated that they would assume liability for the debt in the event that the primary borrower couldn’t pay. The fact that the primary borrower has had their obligation to pay the debt extinguished does nothing more than trigger the liability of the co-signer on the remaining portion of the debt. Technically, the creditor can demand money from the co-signer immediately after finding out that the primary borrower has filed a Chapter 7 bankruptcy.
Co-signers and Chapter 13 Bankruptcy
Co-signers fare far better in a Chapter 13 bankruptcy. In a Chapter 13, co-signers are protected as long as the debt in question is a consumer debt (i.e. not a business expense), and the co-signer cannot benefit from the proceeds of the debt. If those conditions are met, and the debtor remains in a Chapter 13 bankruptcy, creditors are not allowed to go after the co-signer for any portion of any debt upon which they’d otherwise be liable.
Now, it is important to note that if a debtor’s Chapter 13 plan does not allot for a repayment of all of a debtor’s debts, those debts are discharged at the end of the case. (i.e. if the debtor has accrued $100,000 worth of credit card debt, but, based on their Chapter 13 plan, they can only pay back $60,000, the obligation to pay the remaining $40,000 is discharged at the end of the bankruptcy) Cases such as these put the co-signer in a situation akin to the Chapter 7 example; they would be liable for any portion of the debt that was not paid off, and the creditor could demand payment from them once the debtor’s Chapter 13 bankruptcy had concluded.
