Do you have debt that has been co-signed by a relative or friend? Well if you file for bankruptcy, there is some limited protection for that co-signer through the automatic stay; but it is only temporary. Debtors who file for Chapter 7 bankruptcy or Chapter 13 bankruptcy enjoy the full protection of the automatic stay during bankruptcy and cannot be pursued by creditors for the repayment of a debt that has been discharged in bankruptcy. However, if their debt was co-signed by someone else the creditor will have the power to pursue that co-signer for repayment after the bankruptcy case is closed or discharged and in some cases they may be able to pursue the co-signer for repayment while the bankruptcy process is ongoing.
If a debtor in Chapter 13 bankruptcy has a co-signed “consumer” debt then the creditor is temporarily prohibited from pursuing the other debtor for repayment of the co-signed debt. This bankruptcy law was implemented to prevent creditors from applying indirect pressure on the bankruptcy debtor. However, the reality is that this will only delay collection action against the co-signer. If the debtor’s Chapter 13 bankruptcy plan does not allow for the full repayment of the co-signed debt, the creditor may ask the bankruptcy court for permission to pursue the co-signer for repayment of the debt. Most likely that permission will be granted to the creditor. For debtors considering bankruptcy who have co-signed debt, please take the time to discuss your bankruptcy with the co-signer. It is best to be honest and up-front about your financial situation. Even if they get upset by the bankruptcy, you have a better chance of salvaging your relationship with the co-signer if you are honest and avoid allowing the ramifications of the bankruptcy to be a surprise.