A Fresh Start against Your Co-Signer
Feb. 19, 2016
Through bankruptcy, you may be able to and want to pay a co-signed debt. If not, you need protection from that debt and from your co-signer.
A friend or relative may have helped you earlier by co-signing a debt for you. But now you find yourself needing relief from all or most of your debts through either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts.”
So what happens to your co-signed debt? And what happens to whatever responsibility you may feel towards your co-signer?
In the last two blog posts we explained how either a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” may help you be able to pay the co-signed debt. These two kinds of bankruptcy provide a certain amount of indirect or direct protection for your co-signer.
But what if—even with the help of bankruptcy—you simply can’t afford to pay the co-signed debt now or at any time in the foreseeable future? You may no longer want to pay your co-signer because your relationship has soured. Your co-signer may be the one who received the benefit of the debt and should pay it back. Or you may still want pay it eventually but have no idea when. In all these situations you need legal protection against your co-signer.
Your Legal Obligations to the Co-Signer
You need legal protection from your co-signer when you file a bankruptcy case because you either have a clear legal obligation to him or her, or at least a significant risk of such an obligation. Either way you should take care of it within your bankruptcy case.
You have a clear legal obligation to your co-signer if the two of you formalized the terms of that obligation, perhaps in writing but orally may be enough. The basic terms would include who was supposed to pay the debt and what would happen if that person did not pay it.
For example, you and your co-signer may have explicitly agreed that you would be responsible for making all the payments on the debt, and that if you did not make any payment on time so that your co-signer had to pay it, then you would owe him or her however much he or she paid.
Practically speaking often when two people jointly share a debt, the obligations between them are often not clearly agreed upon and are seldom put into writing. But even then, legal obligations could arise between them based on their common understanding.
For example, assume you needed a co-signer on a loan for your business, and your sister agreed to co-sign it. You and your business received all the benefits of the loan. Then when later you didn’t pay the loan and your sister had to pay it off, she would likely have legal grounds to come after you for the amount she paid.
Including Your Co-Signer in Your Bankruptcy
Either way, whether your obligation to your co-signer is legally clear or not, if you are filing bankruptcy and not paying the co-signed debt you need to discharge (permanently write off) whatever obligation you do have to that other person. You do this by listing your co-signer as a creditor in your bankruptcy schedules.
To emphasize, you should do this even if you think you don’t really have legal liability. For example, you may remember the co-signer telling you that if you can’t make the payments he or she would do so, and wouldn’t come after you for those payments. Well, he or she may remember it differently. It’s better to err on the side of caution and cover whatever legal liability there may be.
Protection against Your Co-Signer
Once you file bankruptcy, your co-signer—just like all the rest of your creditors—is legally prevented from contacting you to collect the debt. He or she can’t try to make you pay the underlying co-signed debt (which you’ve also included as a debt in your bankruptcy documents). The co-signer also can’t pressure you to pay him or her directly.
If your co-signer tries to do either of these, he or she would be violating the “automatic stay,” the law that prevents creditors from trying to collect during a bankruptcy case. And if you were pursued by your co-signer after the bankruptcy is completed and your obligations legally discharged, he or she would be in violation of the injunction against attempting to collect on a discharged debt. These are both serious violations of federal law.
Paying Your Co-Signer without Legal Obligation
Including your co-signer as a creditor in your bankruptcy documents takes away your legal obligation. It is totally up to you whether you continue to have a moral or any other kind of obligation to the co-signer. The benefit to you is that if you do decide to pay your co-signer or the co-signed debt, it will be done without legal pressure. You will instead be able to pay whenever and to whatever degree your sense of moral or personal obligation tells you to.
Talk with your attorney about your intentions with your co-signer. He or she can show you t