Filing for bankruptcy in New Jersey can bring relief when debt becomes unmanageable. However, you might worry about a parent, spouse or friend who helped you qualify for a loan. A bankruptcy discharge may eliminate your personal responsibility for a qualifying debt, but it generally does not remove your co-signer’s obligation.
How does Chapter 7 affect your co-signer?
The automatic stay stops creditors from collecting debts from you while your Chapter 7 case is active. However, this protection does not cover the person who signed with you. If payments stop, the creditor may try to collect from that person. Missed payments may also appear on their credit reports.
In some cases, you may sign a reaffirmation agreement, which means you agree to remain responsible for an obligation after bankruptcy. If you keep making the required payments, the lender may have no reason to pursue the other signer. However, reaffirmation keeps you legally responsible for the debt if you fall behind later.
Can Chapter 13 temporarily protect a co-signer?
Chapter 13 includes a separate protection called the co-debtor stay. It may temporarily stop a creditor from collecting a consumer debt from an individual who signed with you. This protection generally applies only to debts incurred for personal, family or household needs. It generally does not cover obligations taken on for business purposes.
If your repayment plan pays the creditor in full and you complete the payments, the other signer may have no remaining balance to pay. If your plan pays only part of the amount owed, the creditor may ask the court for permission to collect the unpaid amount from your co-signer. The protection ends when your case is closed or dismissed, or if it is converted to a Chapter 7 or Chapter 11 bankruptcy.
Preparing for possible collection risks
Reviewing the loan balance, payment history and proposed repayment terms can help you understand what your co-signer may still owe. You can also discuss possible collection notices and credit effects before they create unnecessary friction.
Because the loan terms, type of bankruptcy and repayment plan can affect what each person owes, reviewing the documents with a bankruptcy attorney can help you understand whether the co-debtor stay or a reaffirmation agreement may apply.