Bankruptcy and Cosigners: What Happens to Someone Who Co-Signed Your Debt?
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Filing for bankruptcy can provide relief from overwhelming debt, but what happens when someone else is also responsible for one of those debts?
If a spouse, parent, child, friend, or business partner co-signed a loan or credit account, bankruptcy may affect the people connected to that debt differently. A bankruptcy filing may protect the person who files, but it does not necessarily eliminate the other person's responsibility.
This issue is particularly important when deciding whether bankruptcy is the right option. Before filing, it is worth understanding how your case could affect a cosigner or co-borrower.
What Is a Cosigner?
A cosigner is someone who agrees to be legally responsible for repaying a debt if the primary borrower does not pay.
Cosigners are commonly involved with:
Auto loans
Personal loans
Student loans
Credit cards
Leases
Business financing
Other forms of consumer credit
When a person cosigns, they generally take on a legal obligation connected to the debt. Simply being a cosigner does not mean the debt belongs exclusively to the primary borrower.
This becomes important when the primary borrower files bankruptcy.
Does Bankruptcy Eliminate a Cosigner's Responsibility?
Generally, no.
A bankruptcy discharge generally releases the person who filed bankruptcy from personal liability for qualifying debts. It does not automatically release another person who is also legally responsible for the same debt.
The U.S. Courts explained that a bankruptcy discharge generally prohibits creditors from taking collection action against the debtor personally for discharged debts. However, the discharge does not necessarily eliminate another person's liability for the same obligation.
For example, suppose John and his brother both signed a personal loan. John later files Chapter 7 bankruptcy and received a discharge of that qualifying debt.
John may no longer be personally responsible for the discharged debt.
His brother, however, may still be responsible for the obligation under the loan agreement.
This is one of the most important distinctions to understand before filing bankruptcy.
Chapter 7 and Cosigners
Chapter 7 bankruptcy generally provides a discharge of qualifying unsecured debts eligible debtors.
However, Chapter 7 does not generally provide the same special co-debtor protection found in Chapter 13.
If a debt has a cosigner, the creditor may still be able to pursue the cosigner after the bankruptcy case, depending on the circumstances and applicable law.
For this reason, someone considering Chapter 7 should identify all debts involving:
Cosigners
Co-borrowers
Joint account holders
Spouses
Business partners
Understanding these relationships can help prevent unexpected consequences.
Chapter 13 Can Provide Additional Protection for Certain Co-Debtors
Chapter 13 bankruptcy is different.
The Bankruptcy Code includes a co-debtor stay that can provide protection to certain individuals who are jointly liable with the Chapter 13 debtor on qualifying consumer debts.
Under 11 U.S.C. §1301, the filing of a Chapter 13 case generally prevents certain actions to collect a consumer debt from an individual who is liable with the debtor, subject to statutory requirements and exceptions.
This protection is commonly referred to as the chapter 13 co-debtor stay.
However, it is not unlimited.
The co-debtor stay generally applies to qualifying consumer debts and can be lifted under certain circumstances. It also does not mean the cosigner's underlying debt has been permanently eliminated.
What Is the Difference Between the Automatic Stay and the Co-Debtor Stay?
These two protections are related but different.
Automatic Stay
The automatic stay generally protects the person who files bankruptcy from many collection actions involving debts that existed before the bankruptcy filing.
Co-debtor Stay
The Chapter 13 co-debtor stay can provide protection to certain people who are jointly liable for qualifying consumer debts with the Chapter 13 debtor.
The distinction matters because the automatic stay generally focuses on the bankruptcy debtor, while the co-debtor stay can provide protection to certain other individuals.
Can a Creditor Still Pursue the Cosigner?
Potentially.
A creditor may still have rights against a cosigner depending on:
The type of debt
The bankruptcy chapter
Whether the debt qualifies for co-debtor protection
Whether the co-debtor stay applies
Whether the court lifts the stay
Whether the bankruptcy debtor receives a discharge
The terms of the underlying contract
A bankruptcy filing does not automatically erase every person's obligation on a debt.
What Happens If You and Your Spouse Are Both Responsible for the Debt?
Married couples sometimes have joint debts.
One spouse may file bankruptcy while the other does not. In that situation, the non-filing spouse may remain responsible for debts for which they are independently liable.
The consequences can also depend on whether the couple lives in a community-property state or a non-community-property state and how the debt and property are structured.
Missouri and Illinois generally follow different property-law frameworks than community-property states, making the details of jointly held debts and assets particularly important.
If spouses have significant debts, it is important to evaluate both spouses' financial circumstances before deciding whether only one spouse should file.
What If My Cosigner Is a Family Member?
This is one of the most common concerns.
A person may have asked a parent, sibling, child, or friend to cosign a loan years earlier without expecting financial problems later.
If you file bankruptcy, your family member could still face collection efforts depending on the debt and bankruptcy chapter.
Before filing, make a list of debts that involve anyone else.
Ask yourself:
Who signed the agreement?
Is the account joint?
Is someone a cosigner?
Is someone a co-borrower?
Is the debt secured by property?
Is the debt a consumer debt?
What bankruptcy chapter are you considering?
These questions can help identify potential problems before a bankruptcy petition is filed.
What Happens to a Cosigner on a Car Loan?
Car loans require special attention because they involve both a debt and collateral.
Suppose you and a family member are both obligated on an auto loan. You file bankruptcy, but the family member does not.
Your bankruptcy may affect your personal liability for a qualifying debt, but it does not necessarily eliminate the creditor's rights against the vehicle or the cosigner.
The lender may continue to have rights under its security interest in the vehicle.
If you want to keep the vehicle, you may need to address the secured debt through the bankruptcy process.
The specific options can depend on the bankruptcy chapter, the loan balance, the vehicle's value, payment history, and other circumstances.
Can a Cosigner's Credit Be Affected?
A bankruptcy filing can appear on the filing debtor's credit history.
A cosigner does not automatically receive a bankruptcy filing simply because they cosigned the debtor's loan.
However, the underlying account can still affect the cosigner if payments are missed or if the creditor begins collection activity against the cosigner.
This is why people considering bankruptcy should understand the potential consequences before assuming that their filing will have no impact on someone else.
Can a Creditor Demand Payment From the Cosigner After Bankruptcy?
If the cosigner remains legally responsible for the debt, the creditor may generally pursue the cosigner subject to applicable law and any protections that may apply.
The debtor's discharge does not necessarily transfer the debt to the cosigner.
Instead, the discharge generally protects the person who received the bankruptcy discharge from personal liability for qualifying debts.
The cosigner's separate legal obligation can remain.
Can You Protect a Cosigner Through Chapter 13?
In some circumstances, yes.
One potential advantage of Chapter 13 is the co-debtor stay.
If the requirements of 11 U.S.C § 1301 are satisfied, the co-debtor stay may temporarily protect a qualifying co-debtor from certain collection actions.
However, this protection is subject to exceptions.
For example, a creditor may ask the bankruptcy court to allow collection from the co-debtor under circumstances described in the Bankruptcy Code. (law.cornell.edu)
Therefore, Chapter 13 should not be viewed as a guarantee that a cosigner will never be contacted or pursued.
Should You Tell Your Cosigner Before Filing?
There is no universal answer.
However, if another person is legally responsible for one of your debt, understanding how your bankruptcy may affect them is important.
A bankruptcy attorney can receive the debt and explain the potential consequences before you make decisions.
In some cases, discussing the situation with the cosigner may help everyone understand what could happen.
What Should You Do Before Filing Bankruptcy?
If you are considering bankruptcy and have cosigned or jointly held debts, gather your financial information before meeting with an attorney.
Bring:
Loan agreements
Credit card statements
Auto loan documents
Collection letters
Information about joint accounts
Information about cosigners
Recent payment history
Also make a list of every person who may have legal responsibility for your debts.
This can help your attorney identify potential co-debtor issues early in the process.
Frequently Asked Questions
If I file bankruptcy, does my cosigner automatically have to pay the entire debt?
Not necessarily. The cosigner's responsibility depends on the terms of the debt, payments being made, the bankruptcy case, and applicable law.
Can Chapter 7 protect my cosigner?
Chapter 7 generally does not provide the same co-debtor protection available under Chapter 13. Your cosigner may remain responsible for the debt.
Can Chapter 13 protect my cosigner?
Potentially. The Chapter 13 co-debtor stay can protect certain individuals from collection activity involving qualifying consumer debts, subject to statutory requirements and exceptions.
Does my bankruptcy appear on my cosigner's credit report?
Your bankruptcy filing generally belongs to you. However, the jointly held account can continue to affect the cosigner depending on payment activity and the creditor's actions.
Should both spouses file bankruptcy?
Not necessarily. Whether on or both spouses should file depends on their individual debts, income, assets, property ownership, and other circumstances.
Bankruptcy can provide powerful debt relief, but its effects may extend beyond the person who files especially when another individual has cosigned or jointly borrowed on a debt.
Chapter 7 and Chapter 13 can treat co-debtors differently. Chapter 13 may provide additional protection for certain co-debtors through the Bankruptcy Code's co-debtor stay, while a bankruptcy discharge generally protects only the person who received the discharge.
If you have debts that involve a spouse, family member, friend, or business partner, don't overlook those relationships when evaluating bankruptcy.
Understanding the potential consequences beforehand can help you make a more informed decision and avoid unexpected problems for someone who agreed to share responsibility for your debt.
If you are considering bankruptcy in Missouri or Illinois, an experienced bankruptcy attorney can review your debts, explain the available options, and help you understand how a bankruptcy filing could affect both you and anyone who shares responsibility for your debts.
References
United States Courts — Bankruptcy Basics: Discharge in Bankruptcy. Information regarding the effect of a bankruptcy discharge and personal liability for qualifying debts. (uscourts.gov)
11 U.S.C. § 1301 — Stay of Action Against Co-Debtor. Federal Bankruptcy Code provisions governing the Chapter 13 co-debtor stay. (law.cornell.edu)
11 U.S.C. § 362 — Automatic Stay. Federal Bankruptcy Code provisions governing the automatic stay and its exceptions. (law.cornell.edu)
United States Courts — Bankruptcy Basics: Chapter 13. Overview of Chapter 13 bankruptcy, including repayment plans and protections available during the bankruptcy process. (uscourts.gov)
DISCLAIMER: This article is for informational purposes only and does not constitute legal advice. Reading this article does not create an attorney-client relationship. Laws change regularly and the application of any r
ule depends on the specific facts of each case. For guidance regarding your specific situation, please contact A & L, Licker Law Firm, LLC directly.
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