Filing Chapter 13 bankruptcy can help you discharge cumbersome debts and keep important assets. However, if you have cosigners on your debts, it is important to understand how they could be affected if you choose to file for bankruptcy. After you file for Chapter 13 bankruptcy, an automatic stay goes into effect that protects you from collection attempts by creditors. The codebtor stay during a Chapter 13 bankruptcy case can also protect cosigners from collection attempts. However, creditors may attempt to lift a codebtor stay under the following circumstances:
- The case involves non-consumer debts: The codebtor stay only applies to consumer debts. For example, credit cards used to pay for groceries or household expenses could qualify as a consumer debt. However, creditors can attempt to collect from your cosigner for business debts. Credit cards used to pay for business expenses would qualify as business debts.
- You fail to complete your repayment plan: Both you and your cosigner could be on the hook for debts if you do not complete your Chapter 13 repayment plan.
- The debt is not part of your repayment plan: If you do not include the debt in your Chapter 13 bankruptcy plan, the creditor could lift the codebtor stay.
- Your cosigner received the benefits of the debt: A creditor may ask to lift a codebtor stay if your cosigner received the benefits of a debt. For example, if you took out a car loan and your cosigner used the vehicle at all times.
- The creditor’s interests would be irreparably harmed: Creditors may ask to lift a codebtor stay if their financial interests would be irreparably harmed.
Are There Other Options to Protect My Cosigner During Bankruptcy?
A codebtor stay is only possible with Chapter 13 bankruptcy, and can remain in effect throughout the duration of your repayment plan. After completing your Chapter 13 repayment plan, any debts your cosigner may have been liable for could be paid off entirely or discharged.
If you have cosigners on debts, Chapter 13 bankruptcy might be a better option than Chapter 7 bankruptcy. It would depend on your individual circumstances. However, you may also be able to protect your cosigner in Chapter 7 bankruptcy by reaffirming a debt. This is where you agree with your creditor to repay the debt during your Chapter 7 bankruptcy.
If you have a cosigner and want to file for bankruptcy, it is important to discuss your options with an experienced bankruptcy attorney. The Kansas City bankruptcy attorneys at The Sader Law Firm can help you explore options for protecting your cosigner while seeking debt relief.