A Fresh Start at Protecting Your Co-Signer

 Posted on February 15, 2016 in Chapter 7

Bankruptcy may give a fresh start not just to you, but also to your relationship with your co-signer.

Bankruptcy Can Be the Best Way to Help Your Co-Signer

Even if you think that filing bankruptcy would give you the financial relief you need, you may not want to do it because you don’t want to hurt a co-signer. If so, we commend you.

And if don’t want to hurt your co-signer (or anyone otherwise obligated with you on a debt), you will be happy to hear that by filing bankruptcy you can often get both financial relief for yourself and the best practical protection for your co-signer.

Before showing you how, let’s look more closely at the two distinct ways that you might want to protect your co-signer. Then we’ll show how you filing a Chapter 7 “straight bankruptcy” case could provide that protection. And then in our next blog post we’ll show how a Chapter 13 “adjustment of debts” case could deal protect your co-signer in different situations.

Two Ways to Protect Your Co-Signer

First, if you could, you likely want to protect your co-signer from having to pay the co-signed debt. Assuming you are the one who benefitted from her or her co-signing, you don’t want your co-signer to have to pay back your debt.

And second, if possible, you would also like to protect the co-signer’s credit record, so that he or she is not hurt this way either.

Protect Your Co-Signer from Being Forced to Pay Your Debt

We’re assuming that you care enough about your co-signer and feel responsible enough about protecting him or her that you would be willing to pay the debt if only you were able to do so.

Filing Chapter 7 may enable you to do so. “Discharging” (legally writing off) all or most of your other debts may free up enough money so that you could afford to pay the co-signed debt. Or if your co-signer has already paid the debt in part or in full, Chapter 7 may enable you to pay back your co-signer.

Most likely, filing a Chapter 7 case would legally allow you to stop paying all or most of your debts, including the co-signed debt, immediately (if you were paying it beforehand). Then usually within 3 or 4 months your legal obligation to pay that co-signed debt would likely be forever discharged. Indeed, your legal obligation to pay your co-signer would very likely also be discharged.

However, bankruptcy law clearly allows you to pay any debt afterwards if you want to. So, you can decide that even though you don’t have a legal obligation to pay the co-signed debt you still want to pay it.

To determine whether taking on this not-legally-required commitment is appropriate, talk it over very carefully with your attorney. When you review your options with him or her, the two of you will prepare a monthly budget. You’ll be informed about the debts that will likely be discharged and those that you will likely need to and/or want to continue paying (your mortgage, vehicle loan, recent income taxes, and such). From this you’ll be able to make a good estimate about whether you would be able to reliably continue or start making the payments on a co-signed debt.

Protect Your Co-Signer’s Credit Record

If you have not yet fallen behind in payments on your co-signed debt, and if (as just described) a Chapter 7 filing would enable you to keep current on those payments, you could likely prevent hurting your co-signer’s credit record.

But on the other hand if you’ve already hurt your co-signer’s credit record because of failed or late payments, what’s happened in the past cannot be undone. The passage of time will heal his or her credit record, as long as you prevent any further hits on it. You do that by quickly catching up on the back payments right after filing your Chapter 7 case, and then keeping current going forward.

So in looking closely at your after-filing-bankruptcy budget with your attorney, figure out how fast you can realistically come up with the money to bring the co-signed debt current.

If you can’t catch up within a month or two, you’re going to be hurting your co-signer’s credit until you do. So consider the following possibility: if you are in good relations with your co-signer, and can convince him or her that you want to protect his or her credit record, see if he or she is willing and able to pay the creditor the amount needed to catch up to protect his or her credit going forward. In return you’d commit to making the regular monthly payments until the debt is paid off, as well as paying back whatever he or she paid. (But see the caution below.)

Caution: Making New Promises to Your Co-Signer

As stated above, you legal obligation to the co-signed creditor would very likely be discharged in a Chapter 7 bankruptcy. You likely also have separate legal obligation to your co-signer for you to pay that debt so that he or she does not need to, and to pay back any amount that he or she has already paid. That separate obligation to the co-signer will also very likely be discharged in your Chapter 7 case.

If however you decide to continue paying the debt to the creditor to protect your co-signer, or to pay back your co-signer, you are doing so to fulfill a moral or some similar sense of duty. It is not to fulfill a legal duty because that duty is discharged in bankruptcy.

Since you would not be legally obligated to keep paying that co-signed debt, or to pay back your co-signer, if at any point you stopped paying it usually neither the creditor nor your co-signer would have any legal recourse against you.

But you do need to be careful. Discuss the situation thoroughly with your attorney so that you are clear what your legal obligations are, and so that you do not create an unintended legal obligation for yourself.