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Phone: 805.492.7045
Due to precautions related to COVID-19, we have expanded our options for remote consultations. Please contact our office to discuss whether a full phone consultation or video conference is appropriate for your situation.

How Does My Bankruptcy Affect Co Debtor?

Debt can be crippling and in some cases, debtors filing for bankruptcy need help to dispel and get rid of their debt. However, what happens when someone has a debt that has more than one signer on it? Co-debtor should take care of some special considerations to make the most of bankruptcy and ensure that everyone gets a favorable outcome.

What Is A Co-Debtor and How Does My Bankruptcy Affect Them?

When filing for bankruptcy only parties that are listed on the papers and are actually filing are going to be absolved of their debt. If you have a loan that has a co-signer or a guarantor, they are not going to be discharged of their responsibility just because you file for bankruptcy.

When filing for bankruptcy on a debt that two or more people hold, only the person filing is going to be taken off of the debt, and only the person filing is going to be able to stop paying on that debt. The other debtors will have to absorb the responsibility of the debt and of paying it back.

What Is a Chapter 13 & chapter 7 Co-Debtor Stay?

When filing for Chapter 13 bankruptcy, a co-debtor stay is applied to those individuals that are not filing for bankruptcy and will still be on the debt. This helps to prevent the creditors from demanding immediate repayment of the entire debt just because someone associated with it is filing for bankruptcy.

The stay essentially freezes the co-debtor’s debt for the duration of the bankruptcy, so it does not need to be collected during that time, and it can stay in one static position until the bankruptcy is concluded. After the proceedings, the debtor and the creditor may wish to reevaluate the debt or change the terms.

This stay is only applied to consumer debt rather than other debts. Consumer debt is incurred debt for personal or family purposes. It means that you can use the stay for things like medical bills, credit cards, personal loans, car loans, and even mortgages. This does not apply to things like business loans or businesses debt where assets can be liquidated and then be applied to the debt.

There is no stay in chapter 7 bankruptcy. Also, the co-debtor stay only applies to individuals, and it cannot apply to corporations or companies that might be seeking to have a stay created. The co-debtor stay will be lifted when the bankruptcy is over, and the repayment of debt can then resume.

How Will Bankruptcy Affect Joint Accounts and Co-debtors/Co-signers?

If you file for bankruptcy, your cosigners will usually still be liable for joint debts. Your bankruptcy does not affect your co-debtor, their obligation to pay the debt remains, even if you are taken off the debt entirely and or not responsible for the debt anymore, they will still have to pay back the debt, even if you are no longer part of the process. Your co-debtor is still going to be in debt, and they are still going to pay back the debt that is still present after the bankruptcy is finished.

Essentially, you are going to be out of the debt, and no longer responsible while your co-debtor is going to have to keep paying the debt back and negotiate their own bankruptcy if they want to or to figure out what is going to work best for them and their particular needs.

Here’s what you can expect:

● A creditor must stop collection actions while a Chapter 13 case provisionally, and
● You can protect a cosigner by paying off the debt yourself.
● The creditor can continue to manage from a cosigner if you file for Chapter 7

Advantages and Disadvantages to a Co-Debtor Stay in Your Bankruptcy?

When filing for bankruptcy on a debt that is shared it can be difficult to determine what to do and how to handle the other debtor. In many cases, going for bankruptcy with no protection for the other debtor can be difficult, and it can cause the creditor to come back against the person that shares the debt with you for immediate payment.

A co-debtor stay does a few things, for starters, it helps to freeze the debt so that the creditor will not come back against the other debtor until the bankruptcy is complete. It allows the other debtor time to find out what they want to do and how they are going to either repay the rest of the debt or will file for bankruptcy themselves. It also helps the other debtor to prepare and to keep up with the proceedings so that they can see what their options are and what they should then continue to do. In some cases, an automatic stay will take place to protect the other debtor.

A stay is not a permanent solution, however. After the bankruptcy is over, the debt is fair game again and the creditors can seek immediate repayment. A stay is going to offer a momentary reprieve and essentially give the other debtor time to get their affairs in order and to figure out what their next steps are in the entire process.

If you are thinking about filing for chapter 7 bankruptcy, chapter 13 bankruptcy, or any other form of bankruptcy, it is always great to talk with an attorney first. Speaking with an attorney will help you figure out your options, to figure out how to go about the process, and to figure out how to handle the entire bankruptcy and resolve it so that no one person is going to get a short-end of the stick and have to take over the entire debt.