signing document

Bankruptcy and the "co-debtor" stay

If someone “co-signs” a contract in order to help a friend or family member get a loan, that co-signer is legally liable to pay the debt and his or her credit report will reflect that.

What if the borrower files for bankruptcy? A few important points:

1. The cosigner is considered a codebtor both inside and outside of bankruptcy.

2. The creditor can legally pursue the codebtor for payment even if a chapter 7 bankruptcy is filed. There is no automatic stay protection for the codebtor in a chapter 7 bankruptcy.

3. The creditor can only pursue a codebtor if the borrower files a chapter 13 bankruptcy case in certain circumstances, as follows:

a. The case is over and the debt wasn’t paid in full during the plan.
b. The codebtor is the one who received the consideration for loan i.e. actually owns the car.
c. The loan isn’t being paid back during the plan.
d. The creditor can convince the Judge that its interests will be “irreparably harmed” by the continuation of the codebtor stay.
e. If the debt arose in the ordinary course of business and is not a consumer debt.

If you are considering bankruptcy and have a codebtor, you should speak to your attorney about the effect the bankruptcy filing will have both on the codebtor’s credit and requirement to pay the debt.