If you enter into a contract with a co-signer, both of you are legally obligated to pay that debt. If the debt is not paid, the creditor has the right to collect the entire amount of the debt from either one of you. If your co-signer files Chapter 7 bankruptcy, however, the obligation of paying the entire debt can be left up to you.
If your co-signer has racked up a tremendous amount of debt and decides to file for Chapter 7, all of their debts, including the debt that they co-signed for you, will be eliminated when their bankruptcy concludes. Your co-signer can elect to “reaffirm” the debt during their bankruptcy proceeding (meaning they will sign paperwork that continues to obligate them to pay the debt), but they are not necessarily required to do so. You will still be obligated to pay the debt, though.
What If I Am the Co-Signer?
If you co-sign for a loan, for example, for your nephew and your nephew ends up filing Chapter 7 bankruptcy, the debt will be discharged (or wiped out) for your nephew. You will still be obligated to pay for the loan. In other words, it does not matter if you are the signer or the co-signer. If the other party files bankruptcy, your obligation to pay the debt remains intact and the creditor can come after you for the full amount of the debt.
Reaffirming a Loan
In another hypothetical situation, suppose your daughter finds herself in a financial bind with creditors threatening to file lawsuits against her. She files Chapter 7 to eliminate the debt problems that she is haggling with, but she decides to keep her car and continue to make payments on the loan that you co-signed on. The car loan company agrees to allow her to continue with the same agreement she had before as long as she continues to keep up with her payments.
This is called “reaffirming” the loan and in this case, you would still be obligated as the co-signer, just as you were before. Nothing really changes. Your daughter is allowed to keep her car and continue to make her payments. Of course, if she defaults on her payments, you are still on the hook as the co-signer and the creditor will have the right to come after you for payment of the note.
Or Not to Reaffirm…
Say, for instance, the parent purchases a car, drives, and makes payments on it. The daughter, who co-signed for the car loan, ends up experiencing financial problems and filing for Chapter 7 bankruptcy. The daughter no longer wants to be responsible for the car that her parent owns and makes payments on. How does the daughter’s Chapter 7 bankruptcy affect the parent?
Once the daughter’s bankruptcy is discharged and all of her debts are wiped out, she is no longer responsible for the car loan because she did not reaffirm it. Of course, the parent will still be completely liable for the debt, but since the car note is not in default, the parent can still keep the car and continue to make payments. The parent should not experience any adverse issues as long as he or she continues to make the obligatory car note payments on time.
If you are filing Chapter 7 bankruptcy, it is crucial to tell your attorney if you have co-signed on any debts. You cannot pretend those obligations do not exist and leave them off of your bankruptcy filing. Your attorney should be able to help you indicate on your bankruptcy paperwork how you would prefer those specific co-signed debts to be handled.
Are You Considering Filing For Bankruptcy?
If you feel bankruptcy is the best option for your financial situation you need to speak with an experienced bankruptcy attorney as soon as possible. Please contact us online or call our office directly at 888.348.2616 to schedule your free consultation.