Bankruptcy laws are complicated and the interpretation and intervention of the law varies from case to case. In case the loan has co-signatories where one decides to file bankruptcy might affect the others. Most people often fail to understand the application of law in such cases. No wonder bankruptcy lawyers are bombarded with questions surrounding a co-signer filing bankruptcy and its impact on other debtors. In this write-up we shall try and understand the consequences on the debtors when one of the co-signers files a bankruptcy.
In a co-signed debt each of the signatories are 100% responsible for payment of debt. The creditors are authorized to legally collect dues from one or all the co-signers till the debt is cleared. In other words a cosigner filing bankruptcy has little impact on others. The good news is that default on part of one debtor doesn't not trigger default or accelerate loan payments for the other borrowers. It also doesn't affect the credit ratings of others who signed the loan, as long as they don't default on the payments.
If bankruptcy has been filed under Chapter 13 the court issues injunction against all creditors barring them from making any collection attempts. This say applies to all the co-signers along with the person who has filed bankruptcy. However if your co-signers chooses to file the bankruptcy case under Chapter 7 you get no such immunity and the creditors can continue to collect their dues from you.
One of the major areas of concern is when you have taken a secured loan. In such cases your lender might ask you for more collateral to secure the loan in case your co-signer has filed for a bankruptcy. This applies in cases where the collateral belongs to you and not to your bankrupt co-signer. However you need to keep in mind that if the collateral is held jointly it isn't protected by a Chapter 7 or Chapter 13 of the bankruptcy law. In such cases the person filing bankruptcy can decide whether he or she intends to keep interest in the property or surrender it. In case the person opts to surrender interest the creditors can legally repossess the property under the bankruptcy law.
Many people believe that 'discharge' in a bankruptcy case erases the debt. It isn't so, as discharge makes the debt legally unenforceable against the person who had filed for bankruptcy. This waiver is applicable only to the person filing bankruptcy and not to his or her co-signors. The creditor can proceed to recover 100% of the debt from the remaining non-discharged signers.
The law prohibits you from suing your co-signers once he or she has been discharged by a bankruptcy court.
Co-signed debts such as student’s loan and taxes are exempted from being discharged when bankruptcy is filed.
It is advisable that you seek legal help when one of your co-signers has filed for bankruptcy. A attorney will explain to you the nuances of the bankruptcy law applicable in your case.
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