It’s one thing to consider filing New York bankruptcy when you run into financial problems, but it’s another thing entirely when a co-signer of a debt files bankruptcy. The co-signer who is doing fine might suddenly find himself or herself in serious trouble. Here are some things for co-signers to consider should a co-debtor file bankruptcy.
(1) Do not miss payments. Co-signing a loan does not mean only paying an agreed-upon share of the payments. The creditor is entitled to full repayment regardless of who is doing the paying. This means that when a co-debtor files bankruptcy, the co-signer must pick up the bill. This is the largest and most serious commitment that a co-signer undertakes when signing the loan documents, but it’s usually exchanged for lower interest rates and other benefits.
(2) But that doesn’t mean the automatic stay isn’t your friend. When a co-debtor files in chapter 7, the co-signer does not benefit from the automatic stay. Creditors cannot enforce collection efforts on the co-debtor, but they can on the co-signer. On the other hand, if the co-debtor files in chapter 13, then the co-signer might have an advantage. Chapter 13 extends the automatic stay to co-signers, so if the creditor tries to enforce the debt on the co-signer, the co-debtor (not the co-signer) can initiate an adversary proceeding against the creditor for violating the stay. A creditor can seek, and often get, relief from the chapter 13 co-debtor stay. There are several other exceptions to the “co-signer’s automatic stay.”
(3) On the other hand, the discharge lifts the stay. Once the co-debtor exits bankruptcy, the debt persists. This ought to be understandable, but it’s also important to recognize that the discharge order also applies to co-signers hoping to compel payments from former co-debtors after bankruptcy.
(4) It matters who owns the collateral. If a co-signed debt is secured by collateral (this is often a car) then its ownership will bear substantially on what happens to it. If the co-signer holds the title to it, then after the bankruptcy, the secured creditors can enforce payment from the co-signer or foreclose on the property, or else repossess the vehicle. If the co-debtor owns it, then it will be dealt with in bankruptcy. It’s possible that the co-signer can refinance or purchase the interest in the property from the creditor, if the co-debtor surrenders or abandons his or her interest to it in bankruptcy.
Finally, beware the special implications of co-signing student loans.
Everyone can benefit from a co-signed debt, but once the co-debtor enters bankruptcy, it can cause a lot of trouble. Be sure to consult with an experienced New York bankruptcy lawyer before potentially alienating a loan co-signer.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced fair debt collection practices acts Bruce Weiner for a free initial consultation.