What Happens to My Cosigner If I File Chapter 13?

Filing for Chapter 13 bankruptcy offers a structured path to repay debts through a court-approved plan, allowing debtors to reorganize finances over three to five years. For those with co-signed loans, understanding the implications is important, as bankruptcy can affect cosigners’ obligations and protections. This process involves specific legal provisions for shared financial responsibilities.

The Co-Debtor Stay in Chapter 13

Chapter 13 bankruptcy includes the co-debtor stay, outlined in 11 U.S.C. § 1301. This provision automatically halts creditor collection efforts against individuals who co-signed consumer debts with the debtor. Its purpose is to prevent creditors from indirectly pressuring the debtor through cosigners.

This protection differs from the general automatic stay, which shields the debtor and their assets from collection upon filing. While the automatic stay applies broadly, the co-debtor stay extends this protection to cosigners of consumer debts. Consumer debts are those incurred for personal, family, or household purposes, such as car loans, personal loans, or credit cards. The co-debtor stay remains in effect for the Chapter 13 case, protecting cosigners from collection efforts.

How Chapter 13 Repayment Plans Address Co-Signed Debts

The debtor’s Chapter 13 repayment plan determines the impact on co-signed debts and the co-debtor stay’s protection. Debtors propose a plan to repay some or all debts over three to five years, based on income and other factors. If the plan proposes to pay the co-signed debt in full, the co-debtor stay remains in place until the debt is satisfied. This relieves the cosigner of future liability for that debt.

If the Chapter 13 plan proposes to pay only a portion of the co-signed debt, the cosigner becomes responsible for the unpaid balance once the plan concludes or if the stay is lifted. Debtors often prioritize paying co-signed debts in their Chapter 13 plan to protect cosigners, even if other unsecured creditors receive less. This prioritization is permitted under bankruptcy law, recognizing the debtor’s interest in protecting those who assisted them. While the co-debtor stay protects the cosigner from collection during bankruptcy, the debt’s inclusion may still appear on the cosigner’s credit report as a shared obligation.

Circumstances Where the Co-Debtor Stay May Not Apply or Is Lifted

Despite the co-debtor stay’s protection, it may not apply or can be lifted by the court in specific situations. The stay is limited to consumer debts and does not protect cosigners on business debts, as these are not for personal, family, or household purposes. A cosigner on a commercial loan would not receive this protection.

A creditor can request the court to lift the co-debtor stay if the cosigner, rather than the debtor, was the loan’s primary beneficiary. For example, if the loan was primarily for the cosigner’s benefit, the creditor can argue against the stay. Additionally, if the Chapter 13 repayment plan does not propose to pay the co-signed debt, or a sufficient portion, the creditor can petition the court to lift the stay. The stay can also be lifted if the creditor demonstrates irreparable harm.

Once the Chapter 13 plan is completed and the debtor receives a discharge, the co-debtor stay terminates. Any unpaid portion of the co-signed debt then becomes the cosigner’s responsibility. If the debtor’s Chapter 13 case is dismissed or converted to a Chapter 7 liquidation, both the automatic stay and the co-debtor stay end, allowing creditors to pursue collection against both the debtor and the cosigner.

Steps for Debtors and Cosigners

For debtors considering Chapter 13 bankruptcy, identify all co-signed debts early. Communicate transparently with cosigners about the filing and its implications. Debtors should discuss with their bankruptcy attorney how to best treat co-signed debts within the Chapter 13 plan to protect cosigners. This might involve prioritizing these debts for full repayment.

Cosigners also have steps to navigate this situation. Understand your rights under the co-debtor stay, and direct any creditor inquiries to the debtor’s bankruptcy attorney. Cosigners should generally avoid making payments on the co-signed debt while the stay is in effect unless advised by their own legal counsel, as this could impact the stay or their financial situation. Cosigners should also monitor the debtor’s Chapter 13 case, especially how the co-signed debt is treated in the repayment plan.