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Protecting Your Co signor When You Can’t Pay

By Cathy Moran

cosigned loans

Cosigning a loan links you and your cosignor together for the life of the debt.

If you get in financial trouble, your troubles are your co signor’s troubles too.

If you can’t pay your debts, the standard bankruptcy discharge will get rid of your debt, but it doesn’t help your co signor.

Even while you are protected in bankruptcy by the automatic stay, keeping collectors at bay, and by the discharge at the end of the case, anyone who cosigned for you is exposed.

But Chapter 13 isn’t the “standard” bankruptcy.  It has a special protection for people whose debts are co signed.

Automatic stay covers co signors

Unique to Chapter 13, Section 1301 of the Bankruptcy Code extends the protection of the automatic stay to those who are jointly liable with the debtor on consumer debts.

To qualify, the debt must be for a personal or household purpose.  

So a cosigned car loan is covered;

A cosigned business lease is not.

The benefits of the loan must have flowed to the person who filed bankruptcy.  If you co signed a loan made to a friend, your friend isn’t protected by your Chapter 13 stay.

Finally, to keep the stay in place, the Chapter 13 plan must provide for payment in full of the debt.

Co signed debts get preference

Chapter 13 plans are normally required to treat all unsecured, non priority debts the same.  Each of the general unsecured claims gets the same percentage payment through the plan.

But cosigned debts are excepted.  

The debtor can treat the cosigned debt differently and better than other debts.

It’s OK to separately classify a co signed debt and pay it in full, while other debts get little or nothing in Chapter 13.

So your plan can say:   pay 100% of the allowed claim on the joint credit card claim of BIG BANK, and far less to everyone else.

After the plan is over

The only sticky point for the co signor, who is protected from collection on the co signed debt during the plan, is that interest that may accrue on the debt over the life of the plan.

At the end of the plan, the principal on the debt and any interest owed when the case was filed, will have been paid.  But the bankruptcy case doesn’t stop the accrual of interest at the contract rate during the plan.

The cosignor will remain liable for that interest despite the bankruptcy.

Power of Chapter 13

The co debtor stay and the ability to separately classify co signed debts is just another reason why, as a bankruptcy attorney, I love Chapter 13.

Consider

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Filed Under: Chapter 13, Consumer Rights Tagged With: 2017

About Cathy Moran

I'm a veteran bankruptcy lawyer and consumer advocate in California's Silicon Valley. I write, teach, and speak in the hopes of expanding understanding of how bankruptcy can make life better in a family's future.

Bankruptcy Basics

About The Soapbox

You’ve arrived at the Bankruptcy Soapbox, a resource of bankruptcy information and consumer law.

Soapbox is a companion site to Bankruptcy in Brief, where I try to be largely explanatory and even handed (Note I said “try”).

Here, I allow myself to tell stories and express strong opinions. We dig deeper into how to consider bankruptcy and navigate a bankruptcy case.

Moran Law Group
Bankruptcy specialists for individuals and small businesses in the San Francisco Bay Area

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