Can They Go After the Cosigner If You Filed Bankruptcy?

Chapter 7

Because a Chapter 7 bankruptcy erases most debts, except for student loans, child support and some tax obligations, creditors typically lose money when you file for this type of bankruptcy protection. This means that they either have to write off the debt or pursue collection from other sources. If a co-signer on a loan or other debt is not included in the bankruptcy filing, the creditor is free to pursue collection from the co-signer.

Although the primary purpose of choosing Chapter 13 over Chapter 7 is to prevent loss of nonexempt assets, such as a home or vehicle, opting for Chapter 13 bankruptcy can help protect your co-signer against collection efforts by the creditor. This is because in a Chapter 13 bankruptcy, you work with the court to make arrangements to repay all or part of your debts over a three-year to five-year period. Because the creditor is effectively forced into a repayment plan, it cannot pursue recovery from the co-signer.

Creditors sometimes request Chapter 7 bankruptcy filers to enter into reaffirmation agreements. This agreement stipulates that, even though the debt is discharged in the bankruptcy filing, you agree to continue making payments. This allows you to retain property, such as electronic equipment or vehicles, that secures the debt. Although the creditor is not prohibited from pursuing recovery against the co-signer, making payments according to a reaffirmation agreement may reduce the creditor's motivation to collect against the co-signer.

Co-signer protection in a Chapter 13 bankruptcy depends on your fulfillment of your repayment plan. If you stop making payments according to a Chapter 13 plan, the creditor is free to pursue recovery against a debt co-signer.

Also, co-signers are not protected by a Chapter 13 repayment plan if the debt was business-related, rather than a consumer debt, or if the co-signer was the only party who benefited from the debt -- for example, if the co-signer solely drives a financed vehicle included in a Chapter 13 filing.