Does Chapter 13 Bankruptcy Affect a Cosigner’s Credit?
Learn the nuanced ways a primary borrower's Chapter 13 bankruptcy affects a cosigner's credit and responsibilities.
Chapter 13 bankruptcy provides a structured pathway for individuals with regular income to manage debts through a court-approved repayment plan, typically spanning three to five years. A cosigner assumes shared responsibility for another person’s debt, becoming legally obligated if the primary borrower fails to make payments. This article explores how a primary borrower’s Chapter 13 bankruptcy affects a cosigner’s credit.
Understanding Cosigner Obligations
A cosigner agrees to be legally responsible for the debt, meaning they are equally accountable for the entire debt if the primary borrower defaults or files for bankruptcy. The cosigner’s legal obligation to the creditor remains intact, even if the primary borrower makes payments through a Chapter 13 bankruptcy plan.
Creditors retain the right to pursue the cosigner for payment, as the primary borrower’s bankruptcy filing does not eliminate the cosigner’s liability. This arrangement ensures lenders have an additional party to seek repayment from.
Impact on a Cosigner’s Credit Report
A primary borrower’s Chapter 13 bankruptcy filing does not directly appear on the cosigner’s credit report. The bankruptcy filing itself is specific to the individual who initiated the bankruptcy proceedings. However, the cosigner’s credit is still affected through the reporting of the shared account’s payment history.
If the primary borrower misses payments or stops paying on the cosigned debt, either before or during the Chapter 13 process, these delinquencies are reported to credit bureaus. Such negative marks, including late payments or charge-offs, will appear on both the primary borrower’s and the cosigner’s credit reports. These negative entries directly impact the cosigner’s credit score, potentially causing a significant reduction.
The status of the cosigned account on the cosigner’s credit report might reflect terms such as “delinquent” or “charged off” if payments are not made as agreed or through the bankruptcy plan. While the primary borrower’s report might indicate “included in bankruptcy,” the cosigner’s report reflects the status of the debt itself, not the bankruptcy filing. The adverse effect on the cosigner’s credit score stems from the payment activity of the shared debt, rather than the bankruptcy filing itself.
Specific Considerations for Cosigners Under Chapter 13
Chapter 13 bankruptcy includes a specific legal protection known as the “co-debtor stay,” which directly impacts cosigners. This automatic injunction temporarily prevents creditors from pursuing a cosigner for a consumer debt while the primary borrower’s Chapter 13 case is active. The co-debtor stay offers a period of relief, allowing the primary debtor to focus on their repayment plan without creditors pressuring the cosigner.
This protection is not absolute and comes with certain conditions and limitations. The co-debtor stay generally applies only to consumer debts, which are debts incurred for personal, family, or household purposes, and does not typically extend to business debts. It is also temporary, lasting for the duration of the repayment plan, which is typically three to five years, provided the primary debtor continues to make payments.
A court can lift the co-debtor stay under specific circumstances, such as if the Chapter 13 plan does not propose to pay the cosigned debt in full. If the plan only covers a portion of the debt, the cosigner remains liable for the outstanding balance once the stay is lifted or the case concludes. Therefore, clear communication between the primary borrower, cosigner, and creditor is important to understand the status of the debt throughout the Chapter 13 process.