A:

Cosigners assume the responsibility to pay for another individual's debt in the event of a default, and that responsibility is not necessarily removed in the event of the debt being listed in a bankruptcy. Under certain circumstances, a cosigner or guarantor may still be pursued by creditors even if the debt is discharged and the primary borrower is relieved of payment liability.

The level of cosigner protection is different between Chapter 7 and Chapter 13 filings. The automatic stay in a Chapter 7 bankruptcy is only extended to you; creditors can still make collection attempts on any cosigners or guarantors. In order to protect third parties, consider reaffirming the debt prior to receiving a discharge. However, a reaffirmation agreement removes any possible discharge benefits and forces you to assume full repayment responsibilities.

You can also receive a discharge and still opt to make payments on a debt, although you have no legal obligation to do so. This could prevent creditors from pursuing your cosigners.

Chapter 13 bankruptcies afford much more protection to cosigners and guarantors. The automatic stay extends to all parties listed on the debt (sometimes called "co-debtor stay"), forcing creditors to pursue a relief from stay to make any collection attempts.

There is one very notable exception to co-debtor stay in a Chapter 13: if one of your debts is not included in the Chapter 13 repayment plan by the bankruptcy judge, then your creditors may once again pursue the cosigner or guarantor on the loan. Debts not listed tend to be small and unsecured.

If you file a Chapter 13 and then convert into a Chapter 7, co-debtor stay protection is lifted and cosigners are once again liable for remaining debts.

RELATED FAQS
  1. What's the Differences Between Chapter 7 and Chapter 11?

    Chapter 7 bankruptcy is sometimes called liquidation bankruptcy, while Chapter 11 bankruptcy is called rehabilitation bankruptcy. Read Answer >>
  2. What are the differences between Chapter 11 and Chapter 13 bankruptcy?

    Discover the differences, including respective advantages and disadvantages, between Chapter 11 bankruptcy and Chapter 13 ... Read Answer >>
Related Articles
  1. Personal Finance

    Co-signing a Loan? Make Sure You Know The Risks

    Contractually, co-signers are just as responsible as the person actually borrowing the money.
  2. Taxes

    File Chapter 7 Bankruptcy

    Chapter 7 is the "liquidation" form of bankruptcy. When people file for Chapter 7, the trustee may sell some of the filer's assets to pay creditors.
  3. Personal Finance

    Don't Want a Co-signer? The Top Alternatives

    You need a co-signer to get that loan or apartment, but you don't have anyone you can ask. What can you do instead? And how to decide if it makes sense.
  4. Taxes

    Your Guide To Chapter 7 Bankruptcy

    Filing for Chapter 7 bankruptcy triggers an automatic stay that forbids businesses from collecting on your debt, or suing you.
  5. Retirement

    Seniors: Before You Co-sign That Student Loan

    If that loan isn't paid back, you could be on the line for the whole amount, plus penalties.
  6. Personal Finance

    Things You Shouldn't Do During A Recession

    These tips can help you avoid financial risk at any time, but they're especially important during an economic slowdown.
  7. Taxes

    How to Hire a Bankruptcy Lawyer

    How do you find the right bankruptcy lawyer? What you should look for to determine the right attorney for you.
  8. Managing Wealth

    The Best Way to Help Your Parents Buy a Home

    If your are thinking of assisting your folks with a home purchase, be sure you understand the financial consequences.
  9. Taxes

    How To Survive Bankruptcy

    Bankruptcy is not the end of the world. You can survive it and come out on the other side more financially solid.
RELATED TERMS
  1. Chapter 7

    A bankruptcy proceeding in which a company stops all operations ...
  2. Bankruptcy Abuse Prevention And Consumer Protection Act - BAPCPA

    Legislation enacted by President George W. Bush in 2005 that ...
  3. Guarantor

    A guarantor is a person who guarantees to pay for someone else's ...
  4. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
  5. Discharge In Bankruptcy

    A permanent order that releases the debtor from personal liability ...
  6. Chapter 10

    A type of corporate bankruptcy filing in the U.S. Chapter 10 ...
Hot Definitions
  1. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability ...
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  4. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  5. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. ...
  6. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability of potential investments.
Trading Center