When you file for bankruptcy, certain legal terms can become confusing, especially when it comes to shared debts. One such term is “co-debtor.” This anyone who shares responsibility for a debt with you. Understanding how co-debtors are treated in bankruptcy is crucial for anyone considering debt relief options.
As an experienced bankruptcy attorney with Warren & Migliaccio, L.L.P., I have helped thousands of clients through Chapter 7 and Chapter 13 bankruptcies. Over the years, I’ve seen the issues that arise when someone has a co-debtor involved in their bankruptcy case. In this blog, I will explain what it means to have a co-debtor, how it affects your bankruptcy, and the legal implications for those involved.
What Is a Co-Debtor?
A co-debtor is someone who shares responsibility for a debt. Typically, they are family members, spouses, or business partners. They may have co-signed a loan or credit agreement with you. When both people are responsible for the debt, creditors can go after either party for repayment if you default.
For example, if you and a family member co-sign a car loan, both of you are equally responsible for repaying it. If you fail to pay, the creditor can pursue either one of you for the outstanding balance. To learn more, check out this blog here https://upsolve.org/learn/bankruptcy-effect-on-co-debtor/.
How Bankruptcy Affects Co-Debtors
The impact of bankruptcy on your co-debtors depends on whether you file under Chapter 7 or Chapter 13. Let’s explore the differences and how each chapter treats those involved in shared debts.
Chapter 7 Bankruptcy and Shared Debts
Chapter 7 is often referred to as liquidation bankruptcy. It eliminates most unsecured debts but does not offer much relief for secured debts, such as mortgages and car loans. When you file under Chapter 7, an automatic stay goes into effect, which temporarily stops creditors from pursuing you.
However, this stay only protects you, not anyone else responsible for the debt. While the bankruptcy case is ongoing, creditors cannot collect from you, but they can still go after them. The co-debtor can continue to be pursued for repayment, even after you receive a discharge.
For secured debts like a mortgage or car loan, the creditor can take back the property if payments are not made. If the property is repossessed or foreclosed on, they are still responsible for any remaining debt after the collateral is sold.
Chapter 13 Bankruptcy and Shared Debts
Chapter 13 bankruptcy differs significantly from Chapter 7. It involves a repayment plan, where you repay some or all of your debts over three to five years. Chapter 13 can help you stay current on payments and avoid foreclosure or repossession.
In Chapter 13, the automatic stay protects not just you, but also anyone else responsible for the debt. This means creditors cannot take action against your co-debtor while the bankruptcy case is pending. However, this protection only lasts as long as you adhere to the repayment plan.
If you fail to keep up with the repayment plan, the creditor can pursue them once the bankruptcy case is concluded.
How Secured Debts Are Affected
Secured debts, like home mortgages and car loans, are treated differently in bankruptcy. If you file under Chapter 7 and surrender the property, the creditor can still pursue your partner for the remaining balance on the loan. This is because secured debts are backed by property, and bankruptcy may only eliminate the debt to a certain extent.
Co-Debtor Stay in Chapter 13
In Chapter 13, there is a provision called the co-debtor stay. This prevents creditors from pursuing someone else responsible for your debt. It provides an added layer of protection for family members or partners who share responsibility for the loan.
The co-debtor stay only applies to certain types of debts, though. For example, it does not cover debts incurred for household goods or personal loans. If the creditor can prove that they would suffer irreparable harm by being stopped from collecting the debt, they may be able to lift the stay.
What Happens If Your Co-Debtor Files for Bankruptcy?
If they also file for bankruptcy, the situation can change. If they file for Chapter 7, they may be able to discharge their own debts, but this does not automatically protect you. Creditors can continue pursuing you for the debt, even if the co-debtor gets their debts discharged.
However, if they file for Chapter 13, both of you may be protected from creditors during the bankruptcy process. If they are also under Chapter 13, the protection extends to both parties, allowing you both to reorganize debts and repay them according to a court-approved plan.
Can You File Bankruptcy Without Involving Your Co-Debtor?
The answer is yes, but it can complicate matters. If you file for bankruptcy and they do not, the creditor may still pursue them for repayment after your case ends.
If you are considering bankruptcy, it’s important to consult with an attorney. They can help you understand the implications of such a decision and whether it will impact their financial situation.
Key Takeaways About Shared Debts and Bankruptcy
| Aspect | Chapter 7 Bankruptcy | Chapter 13 Bankruptcy |
|---|---|---|
| Automatic Stay | Temporarily stops creditor actions but only protects the debtor. | Protects both debtor and co-debtor from collection actions. |
| Secured Debts | Co-debtor is still responsible after collateral is repossessed. | Repayment plan allows you to keep property and avoid foreclosure. |
| Co-Debtor Protection | Co-debtor may still be pursued after bankruptcy. | Co-debtor stays protected under the repayment plan. |
| Co-Debtor Stay | Does not apply in Chapter 7. | Co-debtor stay applies, preventing collection from co-debtor. |
Whether you choose Chapter 7 or Chapter 13, the bankruptcy process can provide relief from creditors and give you a fresh start. However, if you have co-debtors, it’s essential to understand how they are impacted by your filing.
At Warren & Migliaccio, L.L.P., we are here to help you navigate your bankruptcy options. Contact us online to schedule your free consultation here https://www.wmtxlaw.com/contact-us/. We can help you protect your financial future, whether you are filing alone or with others involved in your debts.
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