How Will Bankruptcy Affect Someone Who Cosigned On My Debt?
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Chapter 7 Bankruptcy:
Person Filing Surrenders Property
First of all, keep in mind in order to file a Chapter 7 bankruptcy you must be current on everything unless you are willing to surrender the property. Let’s consider the following example: you owe on a debt such as a car loan, but are behind on the payments. You come in for a free consultation, learn that you may be eligible to file a Chapter 7 bankruptcy, and decide you are going to surrender the property to the creditor since you are behind on payments. However, someone has cosigned on the debt with you, and you are wondering what that is going to mean for the other person. He or she (the cosigner) would still be responsible for the full amount that is owed to the creditor. The creditor will typically sell the property an auction and the cosigner will be responsible for the deficiency balance.
If the debt is an unsecured debt (no property as collateral) then the creditor can go after the cosigner for the full amount owed on the debt.
Person Filing Keeps Making Payments
Chapter 13 Bankruptcy:
Person Filing Surrenders Property
If you are filing Chapter 13 bankruptcy and have decided to surrender property, the cosigner will be affected in regards to the debt. Typically speaking, the creditor will still seek the amount owed from the cosigner and hold them responsible for the debt amount after it has been sold at an auction. It’s up to the person filing whether or not to let the cosigner know that they are going to be surrendering the property. However, it’s important to know the cosigner will be responsible for paying back the deficiency balance on the debt.
Person Filing Does Not Surrender Property
In a Chapter 13 bankruptcy, if the person keeps making payments on the property and decides not to surrender it, the cosigner will not be affected most of the time. Chapter 13 bankruptcy is a repayment plan but as long as the person filing is making payments on the debt, the cosigner should not be impacted. However, there have been rare situations where we have seen someone who has cosigned on a debt with a person who filed a Chapter 13 bankruptcy and on the cosigner’s credit it shows they are one month behind on payments despite the fact that it is being paid within the Chapter 13 bankruptcy plan. Since the Chapter 13 bankruptcy Trustee does not make the full payment each month (they typically pay 1/60th of the amount owed over the course of 60 months) the creditor may report that the cosigner is behind a portion of a payment. This doesn’t happen often but we have seen it before so we wanted to be sure to make you aware of it.
