It is fairly common for my clients to have concerns about how their bankruptcy will affect people who have cosigned for loans or leases. What clients are hoping is that they can file bankruptcy that will not affect their cosigners – who are often close friends or family members. It is natural for you to want to protect these people from the consequences of your bankruptcy filing. Unfortunately, there is no easy way for Bankruptcy Lawyer in Salt Lake City to do that. There are some options, but before I discuss those, let me explain why this situation is so sticky.
When a cosigner signs a loan with you, that person is making the same promise to repay the loan that you are. It may be the case that the two of you have an understanding that you are going to be the one paying back the loan, and that the cosigner is only signing so that you can get more credit or a lower interest rate. Of course, as your Utah Chapter 7 bankruptcy lawyer can tell you, this understanding has no legal effect. The person who cosigned your loan is equally liable for that debt, and your creditor will expect to be able to collect from them.
So, what happens, then?
If you file a Chapter 7 Bankruptcy in Utah, you are required to list any codebtors – people who cosigned on any of your debts. These people will be officially notified of your bankruptcy. After you file bankruptcy the automatic stay will go into effect, and this will prevent your creditors from taking any action to collect this debt from either you or your codebtor. HOWEVER, if and when you receive a discharge you codebtor will remain liable for the entire debt that they cosigned – and the creditor will then be able to use any legal means to collect on the debt.
This is the unfortunate fact of the matter, and there’s nothing that a bankruptcy attorney can do to massage the situation for you. If this state of affairs is unacceptable, you have 3 options:
- Reaffirm the debt – you can choose to enter a reaffirmation agreement for the debt, and the debt will survive your bankruptcy. Usually, you will go on repaying the loan with the same terms as before, and it will be as if you never filed bankruptcy – your cosigner will not be solely liable for the debt.
- You can file chapter 13 bankruptcy instead of chapter 7 bankruptcy. When you file chapter 13 bankruptcy a stay will go into effect protecting your codebtors throughout the course of your chapter 13 payment plan. In some circumstances, you will be able to pay off the entire cosigned debt during the course of the plan so that when you receive your chapter 13 bankruptcy discharge, your cosigner will be off the hook. At the very least, entering a chapter 13 plan may allow you to pay back some of the debt, while buying time before your cosigner gets stuck with it.
- The most common solution – you simply talk person to person with your cosigner, explain your situation, beg their understanding, and come to an agreement between the two of you that you will pay the debt back – even though you are not legally bound to do so. Most of the time, cosigners are close friends or relatives that will be understanding and compassionate. They also know that you are more likely to stick to your word due to your relationship with them. If your cosigner is a sibling or parent, this solution may be better for everyone than options 1 or 2.