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Filing Bankruptcy: When Outstanding Debt Includes a Cosigner

Posted By Allmand Law Firm, PLLC || 1-May-2013

A borrower who is establishing credit or has less than perfect credit may have a cosigner help them obtain a loan. A cosigner agrees to pay outstanding debt when the borrower is unable to make payments. It is common to have a cosigner present when applying for a loan on a vehicle, student loan, or even a credit card. Also known as a guarantor or co-debtor, the cosigner agrees to terms of the loan along with the borrower when the agreement is signed. In short, the cosigner agrees to be liable for debt when the loan defaults. So what happens if the borrower files bankruptcy?

If the borrower files for bankruptcy protection, creditors may pursue the cosigner for payment since they also carry liability in what is owed. This depends on the chapter filed by the borrower. If the borrower files for protection and is granted a discharge from the debt, the cosigner may be responsible for repaying the debt until it is satisfied.

If the borrower files Chapter 13 bankruptcy, the cosigner is protected from collection attempts from creditors under the automatic stay. As long as the borrower makes payments according to the repayment schedule of the plan the cosigner will remain under protection until the plan is completed.

If the borrower files Chapter 7 bankruptcy, they may qualify for discharge but the cosigner may be liable for paying the debt. When this chapter is filed, the borrower is protected under the automatic stay, meaning debtors cannot purse them for payment. Borrowers who qualify for Chapter 7 may decide to file Chapter 13 so the cosigner has protection from creditors. If you are considering bankruptcy, you should review your options with an experienced bankruptcy lawyer in Dallas-Fort Worth.

Categories: Bankruptcy
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