Chapter 7 does not have the fancy “co-debtor stay” of Chapter 13. But in the right circumstances it can still shield your co-signer better.
If it is VERY important for you to protect a co-signer on one of your debts, you should know the following: sometimes filing a Chapter 7 “straight bankruptcy” is the better way to protect that co-signer and sometimes filing a Chapter 13 “adjustment of debts” is better. Today’s blog post explains when Chapter 7 is the way to go.
Again, this assumes that protecting your co-signer is a very high priority for you. You presumably are not willing to just have the co-signer pay the debt and then either never pay him or her back, or pay it “whenever” you can (which can easily turn into “never”). Your sense of obligation is not so much legal—because if it were, you would just write off the debt through bankruptcy. Rather you are motivated primarily out of a sense of moral obligation to protect somebody who went out of his or her way to help you.
What Do You Mean by “Protecting” Your Co-Signer?
Let’s be clear about what you might mean when talking about wanting to “protect” your co-signer. You may mean preventing him or her from:
1. having to pay any part of the debt;
2. being harassed by the creditor about paying the debt, or being sued for that purpose;
3. hurting his or her credit record; or
4. having your co-signer even knowing about your financial troubles and thus be worried about the debt.
Factors Determining Whether Chapter 7 Will Work for You
Consider these three factors:
1. which of the above kinds of protection for your co-signer are important to you;
2. what is the payment status of the debt; and
3. what you are willing and able to do to pay the debt yourself to protect the co-signer.
If You Are Current on the Debt
You may be able to protect your co-signer in all three of the above ways if you are still current on the debt. You may have been hurting financially but perhaps you’ve put extra effort in keeping current on the co-signed debt precisely because you want to protect the co-signer. But now your finances have gotten worse instead of better, and you know you just can’t keep making payments on the co-signed debt.
Consider filing a Chapter 7 bankruptcy case to resolve your overall financial problems, and also so that you can continue to make the regular payments on the co-signed debt by discharging all or most of your other debts. That way most likely your co-signer will never be pursued on the debt and not have to pay any of it. He or she may never even learn about your bankruptcy filing, and thus have no reason to be concerned about the debt.
It is very likely prudent, and might even be considered required, for you to list your co-signer as a potential creditor on the bankruptcy schedules, with the result that he or she would receive notice of your bankruptcy case. That is something to discuss with your bankruptcy attorney.
You would definitely be required to list the co-signed debt itself in your schedule of creditors, in spite of your intent to pay it. That creditor would likely have a contractual right to contact the co-signer for payment, but may or may not choose to do so if you keep the account current. You may be able to lessen the risk of the creditor contacting your co-signer by giving the creditor assurances that you will continue to keep the account current.
Note that some of these concerns can be better handled in a Chapter 13 case—see the next blog post for more on that.
If You Are Not Current on the Co-Signed Debt
If you have fallen behind in payments on the debt, your co-signer may have already heard from the creditor with a demand for payment. So you may just be trying to prevent the co-signer from being forced to pay the debt.
At this point you may be able to convince the creditor that you will pay the debt, but it may be too late for that. The creditor will likely recognize that you are on the brink of filing bankruptcy and so whatever commitment you make would be discharged in that bankruptcy.
And if you have already filed the Chapter 7 bankruptcy case, you very likely cannot make a legally binding commitment to continue paying the debt. Debts can sometimes be “reaffirmed” in order to remain legally binding (excluded from the discharge of all the other debts). But reaffirmations require a bankruptcy judge’s approval to be binding and a judge is not likely to give approval merely to protect a co-signer.
Furthermore, a creditor which was originally only willing to extend credit to you with a co-signer is not likely to do you a favor in not pursuing that co-signer once you fall behind on the debt.
Again, these concerns may better be able to be resolved by filing a Chapter 13 case.
The Primary Advantage of Chapter 7: More Flexibility
The advantage of Chapter 7 is that after you file it, you can pretty much pay money to whomever you want to, such as on the co-signed debt, or directly to the co-signer. This of course assumes that you would have the financial means to do so, after discharging all or most of your other debts.
Although the Chapter 13 “co-debtor stay” can prevent your co-signor from being pursued for the debt, and from having to pay any of it, it usually does not protect your co-signor’s credit record. That’s because the debt will very seldom be paid in a Chapter 13 plan on the same schedule as required by the debt.
So Chapter 7 is best when you want to protect your co-signer’s credit record, and have the intent and means to do so as soon as the bankruptcy case is filed. If so, filing the case sooner rather than later usually makes sense, to allow you to put your money towards the co-signed debt instead of to your other debts. Also filing sooner helps prevent the co-signed debt from ever falling behind.