How Your Bankruptcy Affects Your Cosigner's Obligation to Pay Your Debt
Richard Fonfrias, J.D.
Chicago's Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
Cosigner or Guarantor
When you want to incur a debt, the lender may require that you get a cosigner. This is a person who is responsible to pay the debt in case you can't. A cosigner is usually a person who has a better credit history and higher income than yours.
A cosigner is not exactly the same as a guarantor. A lender can seek payment from a cosigner at any time. However, a lender must seek payment first from you before pursuing a guarantor. In bankruptcy, however, both will be required to pay your debt, so this fine line has no meaning.
When you file bankruptcy, your discharge erases your obligation to pay your debt. However, your cosigners and guarantors are still responsible for debts they guaranteed. How much of your debts they will have to pay depends on which type of bankruptcy you file, Chapter 7 or Chapter 13.
If you file Chapter 7 Bankruptcy the bankruptcy court's automatic stay immediately stops all collection efforts towards you. The automatic stay does not stop collection activities toward your cosigners or guarantors. So creditors may continue to seek payments from them.
Fortunately, even if you file Chapter 7 bankruptcy, you can protect your cosigners by taking certain steps, like these:
1. You can "Reaffirm Your Debt"
This means, before the court discharges your debts, you can decide to remain personally liable to pay one or more debts. This goes against the purpose of bankruptcy, which is to free you from your debts. Even so, if you remain liable for a debt, then you protect your cosigners and guarantors from being pursued by your creditors.
2. You can pay your debt in full
After your Chapter 7 Bankruptcy discharge, when you are no longer required to pay any of your discharged debts, you can continue to pay off any debts on which your cosigners and guarantors could be held liable.
If you file Chapter 13 Bankruptcy the bankruptcy court's automatic stay immediately stops all collection efforts towards you, as well as your cosigners and guarantors on all non-business debts. This means debts incurred by an individual primarily for a personal, family or household purposes.
The purpose of this provision is to prevent creditors from bringing indirect pressure on you by taking collection actions against cosigners when you file your bankruptcy petition. Limiting the effect of the cosigner stay to consumer debt is very important because often, people will personally guarantee loans made for business purposes. If that is the case, the co-debtor stay would not be applicable.
Creditors are permitted to ask the bankruptcy court to remove the automatic stay
(1) if the cosigner or guarantor benefitted from the transaction;
(2) if you do not intend to pay off the obligation in full through your repayment plan;
(3) if the creditor will endure permanent harm due to the stay.
If the Chapter 13 bankruptcy is dismissed or changed to a chapter 7 bankruptcy, then the automatic stay against the cosigner and guarantor will end.
Under Chapter 13, your repayment plan continues to reduce the balance you owe on your debts, thus reducing the risk to your cosigners and guarantors.
Should you have any questions regarding what happens to your debts when you file a Chapter 7 or Chapter 13 bankruptcy in Illinois, or how filing might affect your guarantor and cosigner's obligations to pay your debts, please give me a call. For bankruptcy advice in Chicago and the greater Illinois area, I offer a free confidential consultation on your first visit to discuss bankruptcy solutions, as well as foreclosure, debt and credit problems, and other troubling financial matters. To make an informed decision that could affect your personal finances for years to come, speak with a qualified bankruptcy attorney to better understand your legal rights. Call Richard Fonfrias of the Fonfrias Law Group directly at 312-969-0730, or email firstname.lastname@example.org .