People who are considering personal bankruptcy have usually backed themselves into a financial corner and cannot afford to stay current on their debts. Bankruptcy is often a good solution because it provides debt relief, halts foreclosure and repossession activity, and prevents creditors from harassing you. However, before you file, you should understand how bankruptcy affects any co-signers who agreed to guarantee your loans.
How Does Bankruptcy Affect Your Co-Signers?
The results vary depending on whether you file Chapter 7 or 13 bankruptcy. The first requires you to sell your nonexempt assets to cover as much of the debt as possible, while the second—for people with a steady, predictable income—lets you restructure the debt and make payments under court supervision.
Should You File for Chapter 7 or 13?
Under Chapter 7, once you file your petition, the court executes a “stay” that protects you against foreclosure and stops harassing phone calls. Once you have liquidated the necessary assets and paid the proceeds to your creditors, the court discharges your debts. The key word here is “your.” The discharge does not apply to your co-signer, who therefore becomes solely responsible for repaying the debt. As part of the agreement, you must disclose any co-signers when you file your petition. Failure to disclose this could negate the bankruptcy.
Under Chapter 13, the automatic stay that prevents creditors from taking action against you also applies to your co-signer, and it lasts until the case is over. The co-signer must be a private individual—not a bank or lending organization—and the debt must be of a personal rather than business nature. In some cases—such as if the co-signer received the benefit of the debt or your restructuring plan doesn't fully repay the debt— the creditor may request that the co-debtor stay be lifted.
If you need legal guidance to help you through a Chapter 7 or 13 bankruptcy, contact the attorneys at The Gil Law Firm in Dothan, AL. They have been helping clients in and around Houston County since 2000. In addition to bankruptcy, they also handle personal injury and Social Security disability cases. Visit their website to learn more about how they can help you, or call (334) 673-0100 to schedule a consultation.