A cosigner is a codebtor who is liable with you for payment of a debt, but who is not obligated to pay unless you fail to pay. A cosigner guarantees payment of your debt . Typically, parents or friends with stronger credit histories act as cosigners for persons who have weak credit or insufficient credit histories. In reliance on the cosigner’s added assurance, the creditor is willing to make the loan to a borrower who otherwise would not qualify for it. If the primary borrower defaults, the creditor can look to the cosigner for payment. If you have failed to make payments or have made late payments on a loan with a cosigner, these defaults may show up on the cosigner’s credit history as well as your own.
If you file a Chapter 7 bankruptcy, your cosigner will not receive any protection from the automatic stay and his or her obligation will not be discharged. The creditor may demand payment from your cosigner as soon as you file under Chapter 7, and the cosigner will remain fully responsible for payment of the debt even after your obligation to pay has been discharged.
If you file a Chaper 13 bankruptcy, your cosigner may be protected, at least initially, by the automatic stay. This protection is specifically intended to insulate a Chapter 13 debtor operating under a repayment plan from indirect pressure exerted by friends or relatives who may have cosigned the debtor’s obligations. In order for the stay to apply under Chapter 13, the debt must satisfy three criteria. First, the cosigner must be an individual (as opposed to a corporation or partnership). Second, the cosigner must not have become liable for the debt in the ordinary course of business. Third, the debt must be a consumer debt; that is, a debt primarily for personal, family, or household purposes. If the debt meets these criteria, the automatic stay will apply, subject to the creditor’s right to have it lifted.
In a Chapter 13 bankruptcy, a creditor is entitled to have the stay lifted if (a) your cosigner (rather than you) received the consideration for the debt (i.e., your cosigner received the loan funds or the property the funds were used to purchase); (b) your Chapter 13 plan does not include payment of the debt; or (c) the creditor’s interest would be irreparably harmed by the stay (e.g., your cosigner has filed for bankruptcy, threatened to leave the locale, or has lost a job; or your cosigner is about to encumber or dispose of property out of which the creditor’s claim could be satisfied or such property may rapidly decrease in value).
If the automatic stay applies to your cosigner under Chapter 13, it will afford protection so long as you continue to make the payments required by your plan. But unless the debt was paid in full under your Chapter 13 plan, once you have the plan and your debts have been discharged, the creditor may proceed to collect the balance of the debt from your cosigner. The creditor may also proceed against the cosigner if your Chapter 13 case is dismissed or converted to Chapter 7.
Regardless of whether you file under Chapter 7 or Chapter 13, if a cosigner ends up paying your debt you may be obligated to reimburse the cosigner unless you properly list him or her as a creditor in your bankruptcy case. The bottom line for a debt with a cosigner is that collection of the debt may be delayed, but the creditor’s substantive rights are not affected.
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