Usually, when you sign a loan, the lender requires a co-signer. This is to ensure that if you cannot pay the loan, the co-signer will pay it on your behalf. More often than not, it happens if you do not have a supporting credit history and the lender cannot rely on you to repay the debt. If you fail to make the payments, the lender has the freedom to go after the co-signer to recover the money owed to them. When you file for bankruptcy, the automatic stay prevents the creditors to collect money from you. However, this does not mean that your co-signers cannot be pursued for the same.
The fate of co-signer in different bankruptcy chapters
If you want to prevent your co-signer from being liable for your debts when you file for a Chapter 7 bankruptcy, you can reaffirm your debts. You assure the lender that you are legally responsible for the debts after your bankruptcy discharge by reaffirming them. If you continue to make payments for this debt after your bankruptcy discharge, the lender will not pursue your co-signer. Another way to protect the co-signer is by paying off the debt, irrespective of the debt being discharged through bankruptcy. For example, if you choose to surrender your car in your Chapter 7 bankruptcy, the lender can sell the car. The co-signer is liable for the deficiency owed to the lender.
On the other hand, filing for chapter 13 bankruptcy protects the co-signers with the automatic stay under the chapter 13 codebtor stay. However, this protection could end if your repayment plan does not propose to pay off the debt completely, or the creditor will suffer permanent harm if the automatic stay is not lifted.
What happens after a bankruptcy discharge?
Once your bankruptcy chapter is over, all your unsecured debts, including credit card debts, personal loans, utilities, income taxes, and medical bills, are erased. However, student loans and some income taxes survive bankruptcy. Other debts that are not discharged in bankruptcy include alimony, child support, and criminal fines. Although you end up getting a bankruptcy discharge removing your liability for those loans, your co-signer can be held responsible for the full amount of debt unless they too file for bankruptcy. Student loans, though unsecured, are treated at par as unsecured creditors.
Usually, parents or some other relatives are the co-signers for student loans. As a result, if the student cannot make the payments, the co-signers are required to do so. Co-signers can either pay off the old loan or refinance it with a new one to get rid of their student loan obligations. Another way to get free of this obligation yes to show undue hardship through bankruptcy.
If the co-signer files Chapter 13 Bankruptcy, they may repay part of the student loan or the entire amount through their Chapter 13 repayment plan.