When a debtor files for Chapter 7 bankruptcy and has debt with a co-signer, they automatic stay will NOT apply to their co-signer. However, if the debtor is filing Chapter 13 bankruptcy , the co-signer will be protected by the automatic stay under most circumstances.
Here's what you need to know:
- The automatic stay in Chapter 13 bankruptcy is extended to the co-signer because it is assumed that the debtor will pay the debt through their Chapter 13 bankruptcy repayment plan. On the other hand Chapter 7 bankruptcy discharges unsecured debts so there is no reason to protect the co-signer with the automatic stay.
- If the bankruptcy debtor does not pay his/her debts in full during the course of the Chapter 13 bankruptcy, the co-signer will be liable for the balance of the loan and will not have the protection of the automatic stay. What this means is that after the debtor completes the Chapter 13 bankruptcy plan, the creditor has the right to pursue the co-signer for any balance remaining on the debt.
- If a Chapter 13 bankruptcy is converted to Chapter 7 bankruptcy or dismissed the co-signer will lose the protection of the automatic stay.
- If the bankruptcy court determines that protecting the co-signer with the automatic stay will cause "irreparable harm" then the bankruptcy court can lift the automatic stay and allow the creditor to pursue the co-signer for payment.
If you're considering bankruptcy and have a co-signer on some of your debts, don't let the bankruptcy be a surprise. Take the time to talk to your co-signer and let them know what to expect.
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