Co-signing a loan for someone means you’re making yourself fully responsible for repayment of the loan. While there may be an agreement between the co-signers as to who is going to make the payments, the lender doesn’t need to honor that agreement. They just want to see the loan repaid, regardless of who pays. When a Chapter 13 bankruptcy is filed an “automatic stay” goes into place that prevents lenders from attempting collection. That automatic stay protects a co-signer as well as the debtor if the Chapter 13 plan will result in full payment of the loan. In other words, if someone files Chapter 13 bankruptcy and their plan will result in full repayment of a car loan that’s been co-signed by a parent, the lender is prohibited from trying to collect the loan against the parent just as they are prohibited from trying to collect against the child. This is known as the “co-debtor stay” in Chapter 13.
An exception to the co-debtor stay is when the plan fails to propose full repayment of the loan that’s been co-signed. In that case, the lender can ask the court to allow them to collect from the co-signer, but only the amount that’s not getting repaid through the Chapter 13 plan. A lender may wait until after the bankruptcy is completed to see how much of the co-signed debt still remains before trying to collect from the co-signer. If you have loans or debt that has been co-signed and are considering bankruptcy contact us so we can discuss the impact of the bankruptcy on the co-signer.