Filing for bankruptcy can help you dig yourself out from under a mountain of debt, but the process can complicate matters in your personal life. Specifically, any co-signer on your debts may not enjoy the same level of protection you'll receive when you file your petition. Here are two ways co-debtors may be affected.
They May Not Be Protected by the Automatic Stay
When you file for bankruptcy, creditors will be subjected to an automatic stay which bars them from continuing collection activity on your account. This automatic stay remains in place until your case concludes. Unless your co-debtor is filing for bankruptcy alongside you, though, he or she may not be covered. This means the creditor can continue attempting to get money from the cosigner for debt you owe.
However, this depends on the type of bankruptcy you file. The automatic stay will cover any and all co-debtors when you file a chapter 13 bankruptcy because it's assumed you will continue paying down the debt. On the other hand, co-signers in chapter 7 cases will not be protected by the automatic stay. Additionally, the moment your chapter 13 case is converted to a chapter 7, your co-signers will lose the protection.
They May Still Be Held Responsible for the Debt
The second issue is the co-signer will still be held responsible for paying the debt. Bankruptcy only removes your responsibility for paying off what's owed. You can be certain that once the debt is discharged through the court, the creditor will go after the co-debtor for the money.
This is even true when you file chapter 13 bankruptcy. Even though you may pay down the balance on the wage-earner plan, any balance left over that's discharged by the court will become the responsibility of the co-debtor. For instance, if you have a credit card with a $5,000 balance and pay off $3,000 by the time your chapter 13 case ends, the co-debtor would be responsible for paying the remaining $2,000.
Handling co-signed debt during bankruptcy can be complex. Your options are to work on removing the co-signer's name from the account before you file for bankruptcy, or make an effort to pay off the debt completely either before you submit your petition or after you receive your discharge.
However, it's important to consult with an attorney before employing either solution to ensure you won't unnecessarily complicate your case. For more information about this issue or help filing for bankruptcy, contact a bankruptcy attorney.