If your debts have become unmanageable, you have the option of filing for bankruptcy protection. In a Chapter 7 bankruptcy, you surrender non-exempt assets to a court-appointed trustee who uses them to repay your creditors. In a Chapter 13, the standing trustee administers a repayment plan under which you pay a percentage of your debts. At the end of your bankruptcy, the court discharges or cancels your remaining liability on dischargeable debts. If you have cosigned a loan and your cosignor files for either Chapter 7 or Chapter 13, you will still be responsible for repayment of the loan in full.
Bankruptcy allows the discharge of most unsecured debts, such as personal loans and credit cards. The bankruptcy discharge is personal to the person who filed bankruptcy and wipes out her liability on the debt but not the debt itself. This means that if your cosigner gets a bankruptcy discharge, you will still be responsible for the payment of the debt. As a cosignor, known as a co-debtor in bankruptcy, you pledged repayment in full should your cosignor fail to pay for any reason, including bankruptcy. Although your cosignor's obligation may have ended with the bankruptcy, the loan is still valid and you will still be legally bound to pay it.
If a codebtor is present on a debt, the codebtor must be listed on the bankruptcy schedules, and the court will send the codebtor notice of the bankruptcy. This protects the bankruptcy petitioner against any claims the codebtor may have against the petitioner for payment. During a bankruptcy case, all legal actions for collection against the petitioner are stayed unless a creditor is granted relief from the stay by the court. At the end of the case, the petitioner's legal liability for the debt comes to an end, provided that the debt is dischargeable.
Chapter 13 Codebtors
In a Chapter 13 action, the automatic stay granted by the court extends to the codebtor as long as the debt is consumer debt and the codebtor is a person. For example, if you cosigned a home or car loan, the stay applies to you as well; if you cosigned a business loan, the stay does not apply to you and only applies to the bankruptcy debtor.
In cases where the codebtor stay is in effect, the codebtor is protected from any collection action unless the court grants the creditor relief from the codebtor stay. However, creditors who are not paid in full through the plan can resume collection actions, including lawsuits, against the codebtor after the Chapter 13 case ends.
Read More: Does Chapter 13 Reduce Debt?
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