What Happens to My Cosigner If I File Bankruptcy in Utah?
If someone cosigned a loan for you, filing bankruptcy generally does not eliminate that person’s responsibility for the debt. Your Chapter 7 bankruptcy may discharge your personal obligation to repay the loan, but the creditor can ordinarily continue collecting from your cosigner.
Chapter 13 bankruptcy offers an important additional protection called the codebtor stay, which can temporarily prevent creditors from pursuing certain cosigners while your repayment plan is in effect.
This distinction can be particularly important when a parent cosigned a vehicle loan, a spouse shares responsibility for a personal loan, or a family member guaranteed a business debt.
In my Utah bankruptcy practice, I consider these obligations before recommending Chapter 7 or Chapter 13 because eliminating a client’s debt should not unnecessarily create a financial crisis for someone who helped them obtain credit.
Does Chapter 7 bankruptcy protect my cosigner?
No. Chapter 7 bankruptcy generally protects the person filing bankruptcy, not someone who cosigned the debt.
Under 11 U.S.C. § 524(e), discharging a debtor’s obligation generally does not affect another person’s liability for that same debt.
For example, suppose your father cosigned a $20,000 personal loan because you could not qualify on your own. If the loan is discharged in your Chapter 7 case, the creditor generally cannot continue collecting the discharged debt from you personally, but your father may remain responsible for the outstanding balance.
Your bankruptcy discharge does not automatically become your cosigner’s discharge.
Can a creditor collect from my cosigner while my Chapter 7 case is pending?
Generally, yes. The automatic stay in Chapter 7 ordinarily does not prevent a creditor from pursuing a non-filing cosigner.
The automatic stay usually stops collection activity against the debtor, but it ordinarily protects the debtor and bankruptcy estate—not every person who may also owe the debt.
That means a creditor might stop calling you after your Chapter 7 filing but continue contacting your cosigner about the same account.
Does Chapter 13 bankruptcy protect cosigners?
Yes. Chapter 13 provides a special protection called the codebtor stay, which can temporarily prevent creditors from collecting qualifying consumer debts from individuals who are liable along with the debtor.
This protection appears in 11 U.S.C. § 1301. A consumer debt generally means a debt incurred primarily for personal, family, or household purposes.
For example, a parent who cosigned a personal loan used for household expenses may qualify for protection under the Chapter 13 codebtor stay.
The creditor generally cannot pursue that individual for collection while the protection applies unless an exception applies or the bankruptcy court grants relief.
However, the protection has important limitations. The creditor may request permission to pursue the cosigner when, among other circumstances, the cosigner received the benefit of the loan rather than the debtor, the Chapter 13 plan does not propose to pay the creditor’s claim in full, or continuing the stay would irreparably harm the creditor’s interests.
The codebtor stay is also temporary. It does not independently discharge the cosigner’s debt.
What happens to my cosigner after I finish Chapter 13?
If the cosigned debt is paid in full, the cosigner generally has no remaining obligation on that satisfied debt. If a balance remains, the cosigner may still be responsible for it.
Suppose you owe $15,000 on a personal loan that your mother cosigned. You file Chapter 13, and your repayment plan provides for payments toward that debt.
If the creditor ultimately receives the full amount legally owed, your mother’s obligation should be satisfied. If the Chapter 13 plan pays only part of the debt, however, your mother may remain responsible for the unpaid amount under the loan agreement and applicable law.
Chapter 13 can provide an opportunity to protect a cosigner, but the proposed repayment plan must be evaluated carefully.
What happens if someone cosigned my car loan?
A cosigner on your vehicle loan may remain personally responsible for the debt even if you surrender the vehicle in Chapter 7 bankruptcy.
Consider this example. You purchase a vehicle for $25,000, and your father cosigns the loan. Several years later, you owe $18,000, but the vehicle is worth only $12,000. You file Chapter 7 and surrender the vehicle.
The lender repossesses and sells the car. If the sale produces $12,000 in proceeds applicable to the debt, a substantial balance may remain.
Your bankruptcy discharge may eliminate your personal liability for that deficiency. However, your father may still be responsible for the remaining balance, subject to the loan agreement and applicable law governing repossession, sale, and deficiency claims.
Surrendering a financed vehicle in bankruptcy does not necessarily eliminate the lender’s rights against a cosigner.
For more information, see Alta Legal’s article Can I Keep My Car If I File Chapter 7 Bankruptcy in Utah?
Will my bankruptcy hurt my cosigner’s credit?
Your bankruptcy filing does not ordinarily appear as the cosigner’s own bankruptcy. However, missed payments, defaults, or collection activity involving the cosigned loan can damage the cosigner’s credit.
A cosigner has accepted legal responsibility for the obligation. Consequently, the lender may report the loan and its payment history on the cosigner’s credit report.
If payments stop, the cosigner may experience negative credit reporting even though that person never filed bankruptcy.
What if my spouse is the cosigner?
If your spouse is legally responsible for a joint debt and only you file bankruptcy, your spouse generally remains responsible for that debt.
Marriage alone does not necessarily make both spouses liable for every obligation. However, when both spouses signed the loan agreement or otherwise became legally responsible for the debt, filing bankruptcy individually generally does not eliminate the non-filing spouse’s liability.
For example, if both spouses signed a $30,000 personal loan and only one spouse files Chapter 7, the creditor may still pursue the non-filing spouse for the outstanding obligation.
Chapter 13 may provide temporary codebtor protection for qualifying consumer debts.
For a more detailed discussion, see Does My Spouse Have to File Bankruptcy With Me in Utah?
What if my former spouse agreed to pay the debt in our divorce?
A divorce decree assigning responsibility for a debt to one spouse generally does not eliminate the other spouse’s contractual liability to the creditor.
If your divorce decree requires your former spouse to pay a jointly signed credit-card balance, the credit-card company may still have rights against you because you originally agreed to be responsible for the account.
The divorce decree may establish rights and obligations between the former spouses, but it does not automatically change the creditor’s contractual rights.
There can also be separate bankruptcy questions concerning obligations created by divorce decrees or property settlements, because bankruptcy law treats certain divorce-related debts differently from ordinary unsecured debts.
What if someone guaranteed my business loan?
A personal guarantee of a business debt can create liability that survives another borrower’s bankruptcy.
Suppose you own an LLC that borrowed $75,000 to purchase equipment and your father personally guaranteed the loan. If you file individual bankruptcy, your father’s guarantee generally remains enforceable according to its terms and applicable law.
The Chapter 13 codebtor stay ordinarily applies to consumer debts, not debts incurred primarily for business purposes.
Alta Legal addresses related issues in What Happens to My Business If I File Bankruptcy in Utah?
What if someone is only an authorized user on my credit card?
An authorized user is not necessarily the same as a cosigner or joint account holder.
Someone who is merely authorized to use a credit card generally does not become personally responsible for the debt solely because of that authorization.
By contrast, a joint account holder or cosigner may have a contractual obligation to repay the account. The distinction depends on the credit agreement and applicable law.
Before assuming that another person is responsible for a debt, I recommend reviewing the actual account documents.
Do I have to disclose my cosigner in my bankruptcy paperwork?
Yes. Bankruptcy debtors generally must identify other people or entities that are also responsible for their debts.
Official Bankruptcy Form 106H, Schedule H: Your Codebtors, requires individual debtors to identify qualifying codebtors and the corresponding creditors.
This can include parents, spouses who are not filing, former spouses, business partners, and other individuals who share liability.
The purpose is to accurately identify the parties who may be affected by the bankruptcy.
Can I protect my cosigner without filing Chapter 13?
Possibly, but there is no universal solution.
Depending on the circumstances, potential options may include maintaining payments on the obligation, refinancing the debt without the cosigner, obtaining a contractual release from the lender, or negotiating an alternative arrangement.
However, these options depend on the lender, the type of debt, and the borrower’s financial circumstances.
A lender generally is not required to release a cosigner simply because the primary borrower files bankruptcy.
Additionally, making substantial payments to selected creditors immediately before bankruptcy can raise separate legal concerns.
Should I choose Chapter 7 or Chapter 13 if I have a cosigner?
The existence of a cosigner can be an important factor in choosing between Chapter 7 and Chapter 13, but it should not be the only consideration.
Chapter 7 may provide faster debt relief, but it generally offers no protection to a non-filing cosigner.
Chapter 13 may provide temporary protection for qualifying consumer debts and an opportunity to address the obligation through a repayment plan.
However, Chapter 13 also requires an appropriate repayment plan, sufficient income, and compliance with additional requirements.
When I evaluate a bankruptcy involving cosigned obligations, I generally want to know who signed the debt, the outstanding balance, whether the account is current, whether the debt is secured, and what the cosigner could realistically afford if the creditor pursued payment.
For a broader comparison, see Chapter 7 vs. Chapter 13 Bankruptcy in Utah: Which One Fits Your Situation?
What should I do if someone cosigned a loan and I am considering bankruptcy?
Before filing bankruptcy, identify every debt involving another person and discuss the potential consequences with your bankruptcy attorney.
In many cases, the concern is not whether bankruptcy can eliminate the debtor’s personal obligation. It is what happens to the person who remains legally responsible.
That person may be a spouse, parent, child, close friend, or business partner.
At Alta Legal, we review joint debts, cosigned loans, personal guarantees, and other financial obligations before recommending a bankruptcy strategy.
The goal is to help clients obtain meaningful debt relief while understanding how the decision may affect the people who share responsibility for their debts.
Schedule a free consultation with Alta Legal or call 385-224-3765 to discuss your situation with a Utah bankruptcy attorney.
Disclaimer
This article is for general informational purposes only and is not legal advice. It does not create an attorney-client relationship. Readers should consult a qualified attorney before making important legal or financial decisions based on their individual circumstances.