How Does Bankruptcy Affect Co-Signers?
Usually, individuals without a strong credit score need co-signers when applying for loans. A co-signer is a person who is contractually responsible for paying off a loan when a primary borrower fails to pay back the particular loan.
If you had someone cosign a loan for you, you must understand how some things can affect your co-signer so you can protect them. Apart from knowing that the co-signer might have to pay off your loan if you fail to make payments, you need to know what would happen if you filed for bankruptcy. For instance, does the fact that a primary borrower had their debts discharged in Chapter 7 bankruptcy means that a co-signer is also off the hook? Also, how does a primary borrower’s decision to file Chapter 13 bankruptcy affect a co-signer? Read on.
Chapter 7 Bankruptcy and Co-Signers
When a debtor files an Iowa Chapter 7 bankruptcy, the automatic stay protects them from creditors. Generally, the automatic stay prevents creditors from continuing with their collection efforts. However, the automatic stay in Chapter 7 bankruptcy only applies to primary borrowers. The automatic stay does not protect co-signers. This means that creditors can still pursue a co-signer even after the primary borrower decides to file a Chapter 7 bankruptcy. Additionally, if the primary borrower’s debt is discharged, creditors will no longer be able to pursue the primary borrower for repayment. However, creditors can still pursue a co-signer even after a primary borrower’s debts are discharged in a Chapter 7 bankruptcy.
If you applied for a loan and had someone co-sign the loan, it is vital that you take steps to protect them. You can take the following steps to protect a co-signer if you decide to file a Chapter 7 bankruptcy.
Reaffirm the Debt
If, for example, a co-signer helped you secure your car loan, you can reaffirm your car debt before receiving a Chapter 7 discharge to protect the co-signer. When you reaffirm your car debt, you can keep your car and protect a co-signer. Reaffirming a debt involves giving up the benefit of a bankruptcy discharge and choosing to be personally liable for a loan again. Nonetheless, before reaffirming a debt, consult a qualified attorney.
Continue Paying Off the Debt
Apart from reaffirming a debt, you can decide to pay off a particular debt even after a Chapter 7 discharge in order to protect a co-signer. You must keep in mind that even though your co-signer can help you make monthly payments, you might be expected to pay the entire amount at once. However, you can negotiate a payment plan with your creditor.
Chapter 13 Bankruptcy and Co-Signers
Chapter 13 bankruptcy might offer greater protection to co-signers. This is because, with Chapter 13 bankruptcy, the protection of the automatic stay applies to co-signers too. As much as a debtor will still owe creditors, the debtor’s creditors won’t be able to pursue the debtor or the debtor’s co-signer(s). However, to ensure you protect a co-signer, you must agree to pay off your debt in full and stick to your Chapter 13 repayment plan.
Contact a Southeast Iowa Bankruptcy Attorney Today
Our experienced Southeast Iowa bankruptcy attorneys can help you if you are thinking of filing for bankruptcy. Also, we can help you if you are a co-signer with some pressing questions about how bankruptcy can affect you. Contact the Noyes Law Office today to schedule a consultation.