A person who cosigns, or acts as a guarantor on a debt may be affected when primary debtor declares bankruptcy. There are a few ways to protect a cosigner or guarantor during a bankruptcy, but it is important to understand each person’s roll in the process.
A guarantor, or a cosigner, is essentially a person who is responsible for paying back another’s debt if he or she is unable to. Creditors will often require a person to have a cosigner or guarantor if they feel skeptical of the person’s ability to repay the debt. This is why most young adults and those with bad credit scores are required to have a cosigner.
Further, there is a difference between a cosigner and a guarantor. A creditor can pursue a cosigner at any time if payments are not being made. With a guarantor, creditors must usually attempt to collect from the primary borrower first before going after the guarantor. If bankruptcy is declared, there is no longer a distinction and both classifications will be obligated to pay back the debt.
When a primary borrower declares bankruptcy it will only eliminate his or her obligation to pay the debt. Bankruptcy does not affect the responsibility or liability of the cosigner and guarantor of the primary borrower’s debt. What protection the cosigner or guarantor will receive depends on whether the primary borrower of the debt declared Chapter 7 or Chapter 13 bankruptcy.
When the borrower files a Chapter 7 bankruptcy, his or her creditors must stop their collection activities against the borrower because the court issues an automatic stay. However, this automatic stay does not extend to the borrowers cosigners and guarantors.
To protect these cosigners and guarantors in a Chapter 7 bankruptcy, a borrower can reaffirm the debt. When a person does this, he or she gives up the benefit of the bankruptcy for that particular debt and remains liable to repay the debt in full. A borrower may also pay off the debt after receiving a discharge to relieve any cosigners or guarantors of the responsibility of the debt.
A Chapter 13 bankruptcy offers much more protection to a borrower’s cosigners and guarantors, because the borrower will pay off these debts through a repayment plan. Cosigners and guarantors of consumer debts are also protected from creditors under the automatic stay. This is often referred to as Chapter 13 co-debtor stay. However, creditors can request the court to lift the automatic stay. This can happen if the cosigner or guarantor actually received some kind of consideration for the creditor’s claim, or the borrower does not propose to fully repay the debt through their Chapter 13 repayment plan. The creditor can also claim it will receive irreparable harm if the bankruptcy stay continues.
For more information on a cosigner’s rights during bankruptcy, contact the Law Office of David M. Goldman, PLLC today at (904) 685-1200.