Client FAQs - How Does Filing For Bankruptcy Affect Co-Signors?

A common situation that arises when people come into my office involves co-signors. Many people I talk to have either co-signed or had co-signers on loans. Typically these loans are for vehicles and clients wonder what will happen to co-signers if they file for bankruptcy.

This is a common questions with a pretty simple answer (most of the time). In general, the filing of a bankruptcy by one co-signor does NOT relieve the other co-signor of liability for the loan. So, for instance, if you have co-signed a loan for someone else and that person files for bankruptcy, you are still responsible for the entire amount of the loan. It often happens, of course, that the person filing for bankruptcy will choose to keep a car or other secured property. If they continue to pay on the property, then the filing of the bankruptcy will not affect the co-signor.

As with most bankruptcy situations, however, there is a caveat. When a bankruptcy is filed, there is a mechanism put in place called the automatic stay. It takes effect immediately upon the filing of the bankruptcy and protects the debtor from any sort of collection activities including phone calls or letters, lawsuits, wage garnishments or bank attachments. The automatic stay does not apply to any co-debtors or co-signors with the bankruptcy debtor. Or does it? There is a situation in which a co-debtor is also protected by the bankruptcy filing.

The bankruptcy code provides for a "co-debtor stay" in a Chapter 13 bankruptcy (11 U.S.C. 1301). The co-debtor stay will stay in effect for the duration of the Chapter 13 plan.  However, a creditor can seek to get relief from the co-debtor stay unless the debt is a "consumer debt" and the debtor is re-paying the debt in full through their plan. If the creditor can show "irreparable harm" due to the co-debtor stay, the court may also grant them relief from the stay. If relief from stay is granted, the creditor can then pursue the co-debtor.

You should talk to an experience bankruptcy attorney for more answers on the scope and effect of co-signing. To speak with an experienced Ohio bankruptcy attorney, or for more information on Chapter 7 and Chapter 13, call me at 330-605-3508 or visit my website at http://www.ohiobankruptcyrelief.com/.