Bankruptcy Questions Answered: How Does Bankruptcy Affect Co-Signers?

Reaching a point in your financial life where chapter 7 or chapter 13 bankruptcy is the best path forward can bring you to a crossroads. You need financial relief, but you don’t want to negatively impact the person who helped you out by co-signing some of that debt. At Hausen Law our bankruptcy attorneys understand the struggle and they’re here with sound advice and what to know about filing for bankruptcy in Ohio, especially when you have a co-signer. Let’s get into the details.

What Is A Co-Signer?

As the word implies, a co-signer is someone who collaborates with you to “sign” loan agreements, both literally and figuratively. While you are primarily responsible for any debt you incur, if you have a co-signer, they are also legally responsible for your debt in that case that you aren’t able to pay. Co-signers do not have access to your loan, they simply provide assurance to the lender that the amount will be repaid, by one way or another. 

It could be that this person is a friend, family member, guardian or other individual. They likely have a more favorable credit score, credit history, or income level and thus may be able to help the borrower to get a loan that they would otherwise be denied. A co-signer may also be able to negotiate better loan rates. 

Whether an individual seeks a so-signer because of their lack of credit history or low credit score, the understanding is that the borrower is the one repaying the money to a lender. Clearly, this is a huge favor that a co-signer does for the borrower, and it could be a risky choice in the long run. If you are looking to file for bankruptcy in Ohio and you have a co-signer, you’re probably wondering how it may affect them.

Credit Score and Co-Signers

You likely already know that filing for bankruptcy will negatively impact your credit score. But can it also affect your co-signer’s credit? Since bankruptcies are tied to social security numbers, the actual bankruptcy filing will only affect you, the debt holder. It will be reported to credit bureaus attached to your personal information, not the co-signer’s. At most the debt that would show on their credit report may be flagged as being part of a bankruptcy case. If, however, you have fallen behind on payments before filing for bankruptcy, that will be reported under both you and your co-signer’s social security numbers, since you are both held legally responsible for the debt. 

Once you establish that you are unable to repay a debt by filing for bankruptcy, the co-signer is then legally responsible for repayment. If they are unaware, unable, or unwilling to do so, and the debt becomes delinquent after you file for bankruptcy, then both of your credit scores will be negatively affected. If the co-signer does repay your debt but that causes them to be in a position where they also need to file for bankruptcy, then of course their credit would also take a hit and it could be more difficult for them to access credit in the future.

Chapter 7 Bankruptcy and Co-Signers

Filing for a chapter 7 bankruptcy immediately puts into effect the automatic stay. This means that creditors cannot hassle you for repayment or threaten repossession. During this time you can work with your bankruptcy attorney and trustee to nail down the details of your case. 

However, the automatic stay does not apply to a co-signer. That means that creditors can go after them for debt repayment, even while you are protected against their efforts. Even if your personal debt could be discharged in a chapter 7 bankruptcy filing, it does not absolve co-signers from their legal responsibility. Creditors could go after co-signers for repayment, even after you are in the clear.

Thankfully, there is a way to protect your co-signer in the case that you need to file for chapter 7 bankruptcy protection. You can opt to continue paying a creditor until the debt is completely paid off. However, it’s important to know that creditors may not be willing to accept informal monthly payments from you if it is known that your co-signer is able to pay the debt in full.

Keep in mind that any repayment should be made after you have filed for bankruptcy, or the trustee could claim preferential repayment and may unwind the payment. The judge may also reject your reaffirmation agreement if they determine that you will not be able to afford the payments post bankruptcy. For the best outcome and most potential options to protect a co-signer, it’s important to stay current on payments. 

Chapter 13 Bankruptcy and Co-Signers

Chapter 13 bankruptcy is a bit kinder to co-signers and includes a "co-debtor stay" which prevents creditors from harassing co-signers during the bankruptcy proceedings. If your circumstances allow, filing for chapter 13 bankruptcy allows you to pay back your debts over 3-5 years’ time, usually precluding the need for creditors to seek repayment from a co-signer. That said, it is possible for a creditor to petition the court to lift the co-debtor stay if any of these conditions are true:

• The co-signer benefited from the loan
• The repayment plan does not pay off the debt in full
• The creditor will suffer irreparable harm 

If your chapter 13 bankruptcy case is dismissed or converted into a chapter 7 case, then the co-debtor stay is automatically lifted.

What Co-Signers Can Do

It goes without saying that agreeing to be a co-signer comes with a decent amount of risk. This individual wants to make sure they fully understand the potential consequences before they agree to co-sign for a friend or family member. That said, though, even the most responsible person can come on unforeseen hard times and suddenly be unable to keep up with their bills, causing them to file for bankruptcy. When that happens, co-signers may be able to look into refinancing the loan so that responsibility transfers solely to the borrower. They can also request that the borrower enact a reaffirmation agreement. In either case, they would do best by working with an experienced Ohio bankruptcy lawyer and staying up to date on the progress of the case.

Get Your Bankruptcy Questions Answered By A Chapter 7 Bankruptcy Lawyer

When a borrower files for bankruptcy in Ohio, it can have serious repercussions for a co-signer, eventually leading to aggressive debt collection efforts and potential credit damage. A debtor who wants to protect their co-signer does have some options, but it can be tricky to navigate. 

If you’re considering filing for chapter 7 or chapter 13 bankruptcy in Ohio and are wondering how bankruptcy will affect a co-signer, it’s time to start working with an experienced Ohio bankruptcy lawyer. James Hausen and his skilled team of legal professionals can help you to determine the best course of action. Give us a call or fill out our online contact form and we will be in touch. Hausen Law is happy to serve all of Northeast Ohio, including the Akron, Canton, Cleveland, Wooster, Dover/New Philadelphia, and Youngstown communities. Contact us today to set up a free consultation.