What Happens to Your Cosigner if You File for Bankruptcy?

If you have any cosigners on loans or credit cards, it may be important to consider how they will be affected if you file for bankruptcy. This is because bankruptcy will not only affect you; it will also impact cosigners and joint accounts. When you file for bankruptcy, a discharge will wipe away your obligation to pay for discharged debts but a cosigner or joint account holder will usually remain liable for the debt.

Are Joint Account Holders and Cosigners Impacted?
A bankruptcy discharge eliminates your legal responsibility for the discharged debts and your lender or creditor cannot pursue you for payment on these debts. Still, cosigners and joint account holders can be pursued by the lender or creditor to recover the money as they are now considered fully liable for the debt. Sometimes cosigners and joint account holders benefit when the other debtor declares bankruptcy, but this will depend on whether you file for Chapter 7 or Chapter 13.

If you file for Chapter 7 or liquidation bankruptcy, your cosigners and joint account holders have absolutely no protection. Creditors can still pursue cosigners for the debt and even sue cosigners to recover the money. Because the creditor can no longer pursue you over the debt, they are also more likely to focus collection activities against your cosigner.

If you file for Chapter 13 bankruptcy, cosigners and joint account holders are automatically protected under the automatic stay protection from collection actions. This protection applies to all joint account holders and cosigners on consumer debts. As long as the stay is in effect, creditors cannot attempt to collect from your cosigners. Despite this, a creditor can get court permission to lift the stay from your codebtor under certain circumstances, including if the cosigner received the main benefit of the loan, the repayment plan does not propose paying the debt in question, or the creditor’s interest will be irreparably damaged if the stay remains active.

Can You Protect Cosigners?
If you are going to file for Chapter 7 bankruptcy and wish to protect your cosigners or joint account holders from creditors, there are two options. The first is reaffirming the debt, which means you are agreeing to remain liable for the debt after bankruptcy by signing a new agreement. This is most commonly done with mortgage debt and car loans. This is a very important decision to make as you will be waiving bankruptcy protection and discharge for this debt.

The second option is continuing to make payments on the loan or paying off the loan completely. Even if the debt is discharged, you can still voluntarily make payments on the debts.

If you are hoping to protect your cosigners when you file for bankruptcy, it’s important to consult with an experienced bankruptcy lawyer in Los Angeles to discuss your options and how they will affect you as well as your cosigners.