Do cosigners receive special treatments in bankruptcy?

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Bankruptcy and its effect on cosigning and cosigners
Bankruptcy and its effect on cosigning and cosigners

Bankruptcy offers the ultimate protection, that you can receive from your debts and creditors, no matter in what debt situation you are in.

But, the issue is, on the contrary, not with the one who is filing bankruptcy. It is about the cosigner, who signed debts with the bankruptcy filer. How will bankruptcy start to treat the co-debtors or the cosigners? Will they be affected the same, as the filers, or something anomalous will happen to them, like the situation getting more dangerous for the cosigners?!

This post is meant to answer this thin but sharp aspect of bankruptcy. It is a critical question that some of the financial experts in DebtCC Community have been dealing with for quite some time.
Let’s take a plunge into what they have to say, and what you should know if you are in the firestorm of bankruptcy and cosigned debts.

As per Tiara Joseph: personal finance advisor and content contributor at DebtCC.

“Cosigning debts has always shown better credit approvals. It’s like a guarantee, that lenders really look forward to.
It’s always better to have backup plans, ya - know!”

A recommended must read post by Tiara.

She’s right.

When you co-sign a debt, it’s more of like a credit line getting approved based on the combined income of two individuals. This decreases the risk potential of loan defaults and so on.
But Tiara also has something to say about cosigned debts and bankruptcy. She asserts that when one debtor files bankruptcy, the liability of the co-signer may still be attached to the debt, until and unless both file bankruptcy, and both show enough reason, at a personal level that they are unable to pay off the debts.
She insists that when the question is about protecting the co-signer in bankruptcy, a Chapter 7 bankruptcy is not at all a good fit. We will evaluate this later.

Ms. Good Nelly and Patricia Sanders (Contributors of DebtCC Forum and Community) indulge more into why bankruptcy is not a good option for cosigned debts. A must read post by Good Nelly.

They both believe that for co-signed debts, it is better to take hold of other debt relief options, rather than just losing hope and filing bankruptcy.
In fact they are quite correct. Cosigned debts mean dual responsibility. The agreement of cosigning reads that, if one of the borrowers fails to make the due payments on the debts, then the other co-signer or co-borrower is obligated to take up the payments, from where they were left off.
This makes a very disturbing situation when a debtor files bankruptcy Chapter 7. This bankruptcy chapter does not have any protection for the cosigner, where creditors can actually go behind this person, even if the filer’s name is taken down from the debt.

“On the other hand, Chapter 13 bankruptcy will definitely elongate the debt payment pattern, and impose an automatic stay on the co-signer as well, along with the filer, but the whole process can get stretched for a period of at least 5 years.
Isn’t it better, that parties just settle the cosigned debts with the lenders and creditors, if the debt amount is beyond the scope of getting paid off in full??”

- adds, Good Nelly with full consent from Patricia.

Therefore,
Do cosigners receive special treatments in bankruptcy?

If a Chapter 7 bankruptcy is filed, then by no way will a cosigner stay protected. The creditors in reality will start to pursue payments from the co-signer once chapter 7 is filed. Chapter 7 will only protect the filer from any debt collection procedures under the legal automatic stay, which is provided by the bankruptcy court to the filer.

But, this benefit is not available for the co-signer, and the debt liability, as a whole, does not get cleared! Hence, a co-signer can expect to keep up with the ongoing payments, even if one of the borrowers has filed a Chapter 7 debt discharge bankruptcy.

However, Chapter 13 bankruptcy and cosigners share a very amicable relationship. Chapter 13, which is also known for reorganization of debts, will extend the automatic stay to the co-signers too, and deliver the same protection as the filer. Still, Chapter 13 can not be a perfect decision, if you believe that the co-signed debts can never be cleared for good.

In such controversies, you are required to sit with lawyers along with the co-signers, and discuss what options are open to you. Bankruptcy is very good for handling personal debt profile, but games will definitely change for co-signed debts.
Feel free to comment down below, and take this discussion further.

Read more about Bankruptcy chapters.

Last Updated on: Thu, 21 Nov 2019

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