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Protection for Co-Signers in Bankruptcy

Generally, a cosigner enters a contract to assist a family member or friend in getting loans and s/he becomes legally liable for that debt.  Thereafter, the cosigner is a “co-debtor” according to the bankruptcy court laws.  A co-signer gets involved only when a problem arises due to the default of the debtor or when a debtor files for bankruptcy.

Though bankruptcy provides wide protection for debtors, it provides very little protection for any co-signers.  Otherwise, the co-signer himself/herself has to file for bankruptcy.

Under a Chapter 7 bankruptcy a debtor is protected from creditors by getting eligible debts discharged.  However, unfortunately for the cosigners, they have no way out as they are not protected by the debtor’s bankruptcy.  The automatic stay is not applied to them.  As there is no protection, creditors can still demand that the cosigner to pay off a debtor’s existing debts.

However, a debtor may take some steps that may offer some protection to their co-signers.  Under a Chapter 7 bankruptcy, debtors can reaffirm debts that include co-signers.  This removes that debt from the bankruptcy process.  Creditors are free to continue to pursue the debtor for payment, to apply for a wage garnishment, or to chase the co-signer for payment.  Debt reaffirmation is the only protection offered to co-signers when a debtor files for a Chapter 7 bankruptcy.

Under a Chapter 13 bankruptcy, co-signers get the same protection as a debtor.  The creditors can approach the co-signer to pay any debts only after the expiration of the bankruptcy process.  However, while the debtor is discharged from the debts, a debt can still be collected from the co-signer.

A co-signer has practically no protection under Bankruptcy except that a Chapter 13 bankruptcy will provide short term protection.  When you co-sign on someone else’s obligation you should be aware of the possible consequences to both the debtor and yourself.

Inside Protection for Co-Signers in Bankruptcy