What Happens When A Co-Signer Files Chapter 7 Bankruptcy?
Filing for bankruptcy is sometimes the best path to realizing a clearer financial future. However, if you are the co-signer on any debts with someone who ends up filing for Chapter 7 bankruptcy, your own financial security may be threatened. Understanding your responsibilities when a co-signer files Chapter 7 bankruptcy is crucial to avoiding being encumbered with an unexpected debt.
Know Your Obligations When a Co-Signer Files for Chapter 7 Bankruptcy
If a person qualifies to file Chapter 7 bankruptcy, such a filing generally discharges them from responsibility for most of their debt. This includes secured loans such as a mortgage or car loan as well as unsecured debt such as credit card balances, personal loans and medical bills.
However, it is important to understand the bankruptcy does not make any debt disappear; it simply means that the person who has filed for bankruptcy is relieved from their repayment obligations. The debt is still in place, which means that any co-signer will become responsible for the entire outstanding balance of the debt.
When a Co-Signer Can Be Protected From a Chapter 7 Bankruptcy Filing
In general, the party filing for Chapter 7 bankruptcy must actively take steps to protect their co-signer from becoming responsible for the entire debt upon their bankruptcy. The party filing for bankruptcy can choose to reaffirm the debt, voluntarily preventing the debt from being discharged through bankruptcy and making themselves jointly liable for repayment. They may also choose to continue making payments on the debt even though they are no longer legally required to do so. In the case of secured debts (such as a mortgage or car loan), the party filing for bankruptcy can choose to surrender the collateral property, reducing the overall amount of debt; in this case, the co-signer would still be responsible for any remaining amount not covered by the collateral.
What Should You Do if Your Co-Signer is Considering Filling for Bankruptcy?
If you are co-signer on a loan and the other party is considering bankruptcy, your options for avoiding responsibility for the entire debt may be limited. Often the best first step to take in such situations is to consult with an experienced bankruptcy attorney yourself. At Clark & Washington LLC, we have over three decades of experience acting as bankruptcy advisors in the Atlanta area. To learn more about your legal options, please schedule a free consultation with us today.