Chapter 13 has a very special way to protect your co-signer, the co-debtor stay. But sometimes the simpler Chapter 7 is more effective.
The last blog post explained how to protect yourself from a no-longer friendly co-signer. But what if one of your highest priorities is to protect that co-signer from being harmed by your bankruptcy filing?
One powerful way is to do so is with the co-debtor stay that is only available by filing a Chapter 13 “adjustment of debts” bankruptcy—a 3-to-5 year payment program. We’ll cover that in the next blog.
If you have other good reasons to be in a Chapter 13 case, then protecting your co-signer through it may be a great solution. There are a lot of situations in which the much lengthier and more complicated Chapter 13 option is well worthwhile.
But in certain situations you can protect your co-signer from your mutual creditor just as well under Chapter 7 “straight bankruptcy,” and maybe even better, and have your bankruptcy completed in a few months instead of several years.
When You Can Protect Your Co-Signer Under Chapter 7
In the following limited circumstances you can both protect your co-signer’s credit and prevent him or her from needing to pay the co-signed debt:
- If the co-signed debt is current, or can be brought current (by either you or your co-signer) so that there won’t be ongoing adverse impact on your co-signer’s credit record; and
- if you are able to maintain the payments on the co-signed debt (once you get relief from paying your other creditors because of your Chapter 7 case), and are willing to do so to prevent your co-signer from having to pay it.
Under Chapter 7 your two distinct obligations in the co-signing situation—to the creditor and to your co-signer (as explained at the beginning of the last blog post)—are both very likely going to be discharged (legally written off) in your bankruptcy case. But bankruptcy law explicitly allows you to pay whichever debts you want to pay in spite of no further legal obligation to do so. Therefore, a simple way to protect your co-signer’s credit and pocketbook is to keep up the payments on the debt until it is paid off.
This may sound obvious, and so you might ask if there isn’t some better, cheaper alternative. Assuming that you absolutely want to protect your co-signer, and assuming that your co-signer has no defense to being legally obligated on the debt, this is probably the cheapest alternative. This all depends on your goals—how important it is to you to protect your co-signer’s credit and pocketbook. If it is important enough, and the above circumstances apply, then part of your motivation in filing a Chapter 7 case may well be to write off your other debts so that you can afford to pay the co-signed one.
Here’s an example to illustrate this.
Zack took out a $7,500 business loan from his local bank a few years ago to start his business, but needed his father, a longtime customer at this bank, to co-sign on it to qualify for the loan. His father very reluctantly agreed. After some initial success with Zack’s new venture, his products just did not get enough traction in the marketplace in spite of his best efforts, and the business eventually failed, a year ago. Because of his father’s co-signing, Zack managed to keep the business loan current. Its balance is now $4,600, with $275monthly payments.
Zack owes about $100,000 in other debts, mostly related to the failed business. They have all been sent to collections and he was just served with a lawsuit by one of the collection agencies. He just started a job which pays enough to cover his living expenses and not much more.
When he met his bankruptcy attorney, Zack told her that he had two goals—get a fresh financial start by discharging his debts, and protect his father’s credit and prevent him from having to pay on the co-signed business loan.
His attorney advised him that he had no good reason to file a Chapter 13 “adjustment of debts” except possibly to deal with the co-signed debt. Instead, on her recommendation Zack filed a Chapter 7 case. Through it all of his obligations were discharged, including the co-signed debt. But he arranged to continue making the $275 monthly payments directly to the bank on behalf of his father—by cutting back on discretionary spending such as clothing and also cancelling his cable TV service.
Within four months after filing the Chapter 7 case his debts were all discharged. A little more than a year past that he paid off the co-signed bank loan. He was happy to write off the $100,000 in debt in part so that he could afford to pay off the co-signed debt and completely protect his father.