Is My Co-Signer Protected? If I File For Bankruptcy, Can My Creditors Sue a Co-Signer?
What a great question! See, I am constantly trying to explain to clients and potential clients why in the world anyone would file for bankruptcy protection under chapter 13 of the bankruptcy code. Well, we have stumbled upon another one of those reasons today.
One such benefit of filing for chapter 13 bankruptcy protection is the protection it affords co-signers on your debt via the creation of a “Co-signer Stay.” This simply refers to the fact that, when a chapter 13 debtor files their case, there co-signers are afforded protection from collection on the debt in question.
Chapter 13 federal bankruptcy law protects individual co-signors on consumer debts where applicable. Let’s consider the scenario where you had a friend or family member cosign on a loan – mortgage, car payment, credit card, or other personal loan.
The filing of your chapter 13 bankruptcy petition may prevent collection activity by creditors against your cosigner. This protection takes effect upon filing, and will remain in effect so long as your case is open. Note that it is possible for creditors to seek relief from this stay on collection efforts.
Let’s consider the cosigner stay in a little more detail. The creation of a cosigner stay requires two important parameters be met :
First, it is important to understand that the cosigner stay created by a chapter 13 bankruptcy case applies only to certain types of debt. Specifically, the debt must be classified as a consumer debt and includes a number of common loan types including car payments, credit cards debt, and personal loans.
An important point to note is that tax debts and those for professional services are not considered consumer debts and therefore your cosigner will not receive the protection afforded by the cosigner stay. Whether or not your mortgage is considered a consumer debt depends on rules specific to the district in which you file.
Secondly, only individual cosigners qualify for protection under the chapter 13 bankruptcy stay. This excludes businesses or business entities from protection when they serve as a cosigner for chapter 13 debtors.
On a final note, it is important to understand that the protection afforded to cosigners by the chapter 13 stay is only temporary. If a chapter 13 case is closed, dismissed, or converter to another chapter, the cosigner protection stops. In addition, creditors can seek relief from the stay created by filing.
As always, if you have any additional questions that can be answered by an experienced bankruptcy lawyer, please don’t hesitate to contact me. I offer free bankruptcy consultations in Phoenix, Tucson and Casa Grande.