If you can’t or won’t pay a co-signed debt, or pay a co-signer, you need to protect yourself from that debt and from your co-signer.
What if you owe a co-signed debt and need bankruptcy relief from all your debts?
In the last two blog posts we explained how bankruptcy helps you pay a co-signed debt and protect your co-signer. A Chapter 7 “straight bankruptcy” may free up enough cash flow so you can afford to pay the co-signed debt. Or the special “co-debtor stay” may protect your co-signer as you catch up on and pay off the co-signed debt over a longer span of time.
But what if—even with the help of bankruptcy:
- you can’t afford to pay the co-signed debt now or at any time in the foreseeable future?
- you no longer want to pay your co-signer because your relationship has changed?
- your co-signer got the money or other benefit of the debt and so should pay it back?
- you still want pay it eventually but have no idea when you’ll be able to?
In all these situations you need legal protection from your co-signer.
Your Legal Obligations to the Co-Signer
You need legal protection from your co-signer because you have a legal obligation to the person or may have one. You either have a clear obligation, or at least a significant risk of one. This actual or possible obligation means you should cover it in your bankruptcy case.
You likely have an actual legal obligation to your co-signer if the two of you were clear about its terms. You wrote it down, or maybe just talked about it but clearly agreed on the main terms. Those basic terms would include who would pay the debt and what would happen if that person did not pay. For example, you agreed that you would pay the debt, and would pay back the co-signer if he or she had to pay any part of it.
Or sometimes when two people jointly sign on a debt they are not clear about the obligations between them. The terms of that obligation are not made clear. Then the co-signer less likely has a legally enforceable claim against the other, but may still try to assert one.
Include Your Co-Signer in Your Bankruptcy
Either way, cover yourself in your bankruptcy case. Whether or not your obligation to your co-signer is legally enforceable, you should act to discharge (permanently write off) whatever obligation to that person you may have. You do this by listing your co-signer as a potential creditor in your bankruptcy schedules.
Do this even if you think you don’t really owe the co-signer anything. You may remember the co-signer agreeing to make the payments if you couldn’t. You may remember the co-signer treating the whole arrangement as a gift. But now he or she may remember it differently. So err on the side of caution and cover whatever legal liability you may have to the co-signer.
How You’re Protected from Your Co-Signer
If you list your co-signer when you file bankruptcy, he or she can’t contact you to collect the debt. The “automatic stay” that prevents virtually all creditors from collecting on their debts applies to your co-signer. He or she can’t pressure you to pay the co-signed debt, or to pay him or her directly.
If your co-signer violates the “automatic stay” by trying to make you pay, he or she could be punished. Similarly, once your debts have been discharged (including your obligation to your co-signer), his or her attempt to make you pay would be illegal, a violation of the injunction against attempting to collect on a discharged debt. These are both serious violations of federal law.
You CAN Still Pay
Including your co-signer as a creditor in your bankruptcy documents takes away your legal obligation. But then it’s still totally up to you whether to pay anything to the co-signer. The advantage is that if you do pay your co-signer or the co-signed debt, you do so without legal pressure. You pay whenever and as much as you can or want to.
Talk with your bankruptcy lawyer about how you would like to deal with your co-signer. To the extent that you have a sense of personal obligation, there are safe ways to satisfy it.