When you file a bankruptcy case, you must list each of your debts in your bankruptcy schedules. Your bankruptcy forms are signed under oath, so you are swearing that each debt you owe is listed. It is possible to forget to list a debt, and if so, an amendment can be filed to correct this mistake. However, purposefully leaving a debt out of your bankruptcy is fraud, including co-signed debts.
What Is a Co-Signed Debt?
A co-signed debt is a debt that has another guarantor on the account. The co-signer is a person who promises to repay the debt if you default on the account. In other words, if your sister co-signed your car loan and you stopped paying the car payments, you sister is legally liable for the debt. The lender can take the same actions against your sister as it can against you, including filing the delinquent debt on her credit report, turning the account over to a debt collector, and filing a collection lawsuit.
Therefore, it may be tempting to help out a friend, family member, or co-worker who needs someone to co-sign a debt or lease agreement but you need to consider the potential consequences very seriously. You could be facing a debt payment that you didn’t expect to be paying.
How Is My Co-Signed Debt Handled in My Bankruptcy Case?
When you list a co-signed debt, the co-signer receives notice of your bankruptcy filing. The notice is to inform the co-signer that you filed a bankruptcy case and that he may be liable for a debt if the debt is discharged. The co-signer receives the same notice that all creditors in your case receive. It provides general information, including the filing date, the chapter of bankruptcy filed, and the date of your bankruptcy hearing.
How the co-debt is handled depends on the type of debt. For example, if you have a co-signed car loan and you intend to continue making payments, the bankruptcy filing should not impact the co-signer. You continue making timely payments, and the co-signer does nothing. However, if you surrender the vehicle, the lender can file a lawsuit against the co-signer to collect any money owed on the account after the vehicle is repossessed and liquidated.
If the co-signed debt is an unsecured debt, such as a credit card, the debt will be discharged through your bankruptcy case. In this case, the credit card company can pursue the co-signer for the full balance of the debt. When a co-signer agrees to be liable for a debt, he agrees to be liable for the entire debt. Therefore, the credit card company will look to the co-signer for full payment of the debt.
If you file a Chapter 13 case, the creditor cannot take action against a co-signer without court approval. This doesn’t mean the creditor cannot send “information only” statements to the co-signer as long as it doesn’t request or demand payment. Some co-signers panic and pay the debt because they fear that their credit will be damaged from bad debt. The co-signer does have the right to repay the debt if he chooses to protect his best interest.
Can I Pay a Co-Signed Debt?
You can choose to pay a discharged debt if you desire. However, you must wait until after your bankruptcy case is closed before you pay the debt otherwise the payments may be considered a preference. Payments that are considered preferences can be recovered by the trustee to be dividedamong all unsecured creditors.
You may want to notify the co-signer before you file your bankruptcy petition. You can assure the person you intend to pay the debt, if that is your choice, to prevent any adverse consequences for the co-signer.
If you have questions about co-signed debts in bankruptcy, seek the counsel of a professional who understands bankruptcy law and who has experience handling bankruptcy matters.