Is a Cosigner Safe in a Chapter 13?

If your credit is iffy, or you don't have much of a credit record, the logical step is to ask a friend or family member to cosign on a loan for you if you need financing. If you're married, it makes sense that you and your spouse will take out certain loans together. In either case, if you can't repay the debt, the person who signed with you is usually responsible for paying it instead. An exception exists if you file for Chapter 13 bankruptcy protection, however.

Chapter 13 bankruptcies differ from Chapter 7 filings in the way your creditors receive payment. In a Chapter 7, a trustee takes possession of your property, liquidates it, or sells it, then turns the proceeds over to your creditors. In a Chapter 13 bankruptcy, you give your trustee your disposable income each pay period, anything over and above that which you need to meet your reasonable living expenses. The trustee apportions these payments among your creditors, usually over three to five years. In both chapters, if balances remain after liquidation or completion of your payment plan, your bankruptcy typically discharges or erases them.

Read More: Chapter 13 Bankruptcy Explained

Before you file for bankruptcy protection, your cosigner is just as liable for a joint loan as you are. The payment history appears on both your credit reports. If you don't pay, the creditor can pursue your cosigner for a remedy, just as it could pursue you. This means your cosigner risks collection lawsuits, wage garnishments and liens if one of you doesn't satisfy the debt.

After you file for bankruptcy, an automatic stay goes into effect. The stay prohibits your creditors from taking any action to collect your debts from you. If they've already filed a lawsuit against you, they must stop prosecuting it. If they've gotten a judgment against you, they can't use it to garnish your wages or place liens against your property. If they're already garnishing your wages, they must stop. If you file for Chapter 7 protection, they can – and probably will – go after your cosigner instead, but Chapter 13 bankruptcies offer co-debtor stays. This means the creditor on the loan your cosigner jointly signed for must stop trying to collect from that individual as well, at least during the term of your Chapter 13 repayment plan.

As with most laws, there are certain loopholes regarding the Chapter 13 co-debtor stay. One catch is that it only applies if you have possession of the collateral or the items purchased with the loan. For example, if you cosigned on an automobile, you must have the use of the automobile. If you cosigned on a credit card, everything purchased must have been for your use or your household. If the creditor believes otherwise, it can file a motion with the bankruptcy court for relief from the co-debtor stay. Because you filed for bankruptcy, not your cosigner, if the motion is successful, the creditor can resume collection efforts against your cosigner.

The co-debtor stay only protects your cosigner during the term of your Chapter 13 repayment plan. At the end of your plan, if you've entirely repaid the loan in question, your cosigner obviously has no further liability. The debt has been satisfied. However, if the creditor received only a portion of the debt through your Chapter 13 plan, your bankruptcy only discharges your personal liability for the loan. When your bankruptcy is over, the creditor can resume collection efforts against your cosigner for the balance due.