Protecting Your Co-Signer in Bankruptcy
Don’t be afraid to file bankruptcy because of how it would affect a co-signer. Your bankruptcy often actually helps that co-signer.
Practical Protection for Your Co-Signer
You may not want to file bankruptcy because you don’t want to hurt a co-signer. You may not want to write off your obligation on the debt and leave your co-signer owing it alone.
If so you’ll be relieved to hear that by filing bankruptcy you can often get both financial relief for yourself and the best practical protection for your co-signer.
Today we’ll show how filing a Chapter 7 “straight bankruptcy” case could provide that relief and that protection. Next time we’ll show how a Chapter 13 “adjustment of debts” case could protect your co-signer when Chapter 7 cannot.
We’re making a couple assumptions here:
- Between you and your co-signer, you were the one who benefitted from the co-signed credit. (You co-signer was helping you out, not the other way around.)
- You care enough about your co-signer and feel responsible enough that you’d be willing to pay the debt if you were able to.
Protect Your Co-Signer from Having to Pay Your Debt
Here is how filing Chapter 7 can protect your co-signer.
“Discharging” (legally writing off) all or most of your other debts may enable you to pay the co-signed debt. It may free up enough of your monthly cash flow so that you could afford its monthly payments. That would of course prevent your co-signer from being required to make those payments.
But what if your co-signer has already paid the debt in part or in full? Discharging your other debts would make it easier to pay back your co-signer, if you want to do so.
Allowed to Pay the Co-Signed Debt, Allowed to Pay the Co-Signer
Filing a Chapter 7 case would legally allow you to stop paying all or most of your debts immediately. This includes the co-signed debt. Then about 3 or 4 months later your legal obligation to pay that co-signed debt would likely be forever discharged. In addition any legal obligation to your co-signer would very likely also be discharged.
However, bankruptcy law clearly allows you to pay any debt afterwards if you want to. This is a way that the law respects you feelings of moral obligation towards a debt. So, you could decide to pay the co-signed debt even if you’d have no legal obligation to pay it.
Similarly, if your co-signer already paid all or part of a debt, you could decide to pay the co-signer back.
Get Your Lawyer’s Advice
Is it really wise to pay the co-signed debt, or to reimburse the co-signer? Are you acting out of an oversized sense of guilt that maybe you should just let go? Are there better places to put your after-bankruptcy resources?
Talk these questions and concerns over very carefully with your bankruptcy lawyer. He or she will not make these kinds of decisions for you, or take them away from you. But it’s likely healthy for you to express your intentions to someone who’s not personally involved. It’s wise to at least listen to the counsel of someone who is legally and ethically bound to serve you.
Plus there’s a very concrete purpose for discussing this with your lawyer. As part of the bankruptcy documentation, the two of you would have prepared a monthly budget. Relatedly, you’d have been informed about the debts that’ll likely be discharged and those that you’ll continue to pay. (These would be your mortgage, vehicle loan, recent income taxes, and such, if applicable.)
From this information you’ll be able to make a better decision about your co-signed obligation. You’ll see whether you could realistically start making the payments on a co-signed debt, or to the co-signor.
Why This Is Better for Your Co-signer than Not Filing Bankruptcy
You’ve got to be very practical about your alternatives. If you are in serious financial hurt, how likely is it that you are going to be able to reliably pay the co-signed debt without some bankruptcy help? So, not filing bankruptcy may be the worst thing for your co-signer. And if you want to protect that person, your Chapter 7 bankruptcy may be the best thing for him or her.