Crucial Question: Can Bankruptcy Protect Me from My Co-Signer?
If you and another person are jointly obligated on a debt, and you can’t pay the debt, you need to prevent the other person from pursuing you.
Protecting Your Co-Signer
The last two blog posts have been about ways to protect your co-signer from having to pay the co-signed debt. They both involved paying the debt in full yourself, with the help of bankruptcy.
Under Chapter 7, you discharge (legally write off) all or most of your other debts so that you can afford to pay the co-signed debt under its usual terms. Under Chapter 13 and its special “co-debtor stay,” you pay the co-signed debt to the detriment of some or most of your other creditors, under terms fitting your budget and accounting for other special creditors, all while preventing the creditor from pursuing your co-signer.
Protection FROM Your Co-Signer
But what if you simply cannot pay the co-signed debt under either of these bankruptcy options? Or what if you decide not to pay that debt? Your relationship with the co-signer may have changed. Or the co-signer may be the one who got the benefit of the credit in the first place and should be the one to pay back the jointly owed debt.
In these circumstances you will need protection from your co-signer.
Your Legal Obligations to the Co-Signer
If you entered into a debt jointly with someone else, you may have formalized the obligations between the two of you. You may have put into writing who was supposed to pay the debt and what would happen if that person did not pay it. For example, you and other person could have specifically agreed that you would pay the debt, and that if you did not and the other person had to pay it, then that person could come after you for what he or she had to pay on the joint debt.
But in many situations when two people both owe on a debt, the obligations between them are not clearly agreed upon and are not put into writing. But even then legal obligations could arise between them based on their common understandings. For example, if you needed a co-signer on a business loan, and you got your uncle to co-sign, with you and your business receiving all the benefits of the loan, then if you later didn’t pay the loan and the uncle had to pay it off, he could likely legally come after you in the amount he was made to pay.
Regardless whether your obligation to the other person on the jointly owed loan is legally clear or murky, if you are filing bankruptcy and not paying the co-signed debt you will want to discharge whatever obligation you do have to that other person. You do this by listing your co-signer as a creditor in your bankruptcy schedules.
Protection from Collection Efforts by Your Co-Signer
Once you file bankruptcy, your co-signer is legally prevented from contacting you to try to make you pay the underlying co-signed debt, or to make you pay the co-signer. For these purposes your co-signer is treated like a creditor.
So he or she would be violating the “automatic stay” by trying to get you to pay the debt after you filed bankruptcy. And if you were pursued by your co-signer after the bankruptcy was completed and your obligations discharged, he or she would be in violation of the injunction against collecting on a discharged debt. These are both serious violations of federal law.
Paying Your Co-Signer without Legal Obligation
But what if you wanted to make your co-signer whole at some point, and just could not do so now or in the very near future?
After you discharge the co-signed debt itself, and also discharge whatever related obligation you may have to your co-signer, you CAN still pay these. You can pay any discharged debt to whatever extent you wnat, and whenever you want. You would just no longer have any legal obligation to do so.
Talk with your attorney about how to do all this safely, without accidently creating a new legal obligation right after having discharged the original one.