Filing bankruptcy is a way out of debt for you (and your spouse if you file jointly), but not all your debts may be solely in your name. If some of your debts are held jointly with a co-signer, how does bankruptcy interact with those accounts?
The short answer is “it depends.” How bankruptcy affects your codebtors depends on whether you file for Chapter 7 or Chapter 13 bankruptcy and how you handle those individual debts. These are legally complex situations that it’s best to navigate with a bankruptcy attorney on your side.
In general, bankruptcy lets authorized users off the hook.
An authorized user is someone permitted to make charges on someone else’s account – usually a credit card. If you have an authorized user on one of your credit cards, that person can use your card to make purchases, but you are solely responsible for making payments on the balance and keeping up with the credit card bills. If that credit card becomes delinquent or goes into default, you’re the one subject to collection action.
As such, if you file for bankruptcy, whether Chapter 7 or Chapter 13, any authorized users on your accounts shouldn’t be subject to collection action since they were never legally responsible for the debt in the first place. That doesn’t guarantee an unscrupulous debt collector won’t try to go after them anyway, but they have no legal obligation to pay up.
That said, filing bankruptcy may affect your authorized user’s credit score, so it may be in their interest to take them off the card as an authorized user before you file.
Chapter 7 usually leaves codebtors responsible for debt, but there are other solutions.
Filing Chapter 7 bankruptcy discharges (wipes out) your debts. You are protected from collection action by the “automatic stay” while your bankruptcy is pending, and once the bankruptcy is complete, those debts are gone. However, if you have a cosigner or joint account with someone else who doesn’t file bankruptcy – that is, not just an authorized user, but someone else who is jointly responsible for the debt itself – then Chapter 7 does nothing to protect them. They are still subject to collection action, and since debt collectors can no longer come after you, it’s highly likely that they will go after your codebtors instead.
One option to protect your cosigner is to “reaffirm” the debt by signing a new agreement with the lender. Another is to voluntarily continue making payments on your debt even though it has been discharged. In either case, you’d essentially be waiving the benefit of your bankruptcy with respect to the joint debt. If you have a large individual debt and a relatively small joint debt, it may make sense to do this, but it’s not a decision to make lightly.
Chapter 13 bankruptcy usually protects codebtors, but there are exceptions.
When you file for Chapter 13 bankruptcy, the court will not only issue an automatic stay protecting you from collection action, but also a “codebtor stay” that protects your cosigners and joint account holders on consumer debts (like credit cards and personal loans) from collection action.
Your creditors can ask the court to lift the stay so that they can collect from your joint account holder or cosigner under some circumstances. For instance, if the codebtor receives the benefit from the loan – say, if your cosigner is driving a vehicle financed through the loan – then the creditor may be able to get the stay lifted. The codebtor stay is also lifted if your Chapter 13 case is dismissed, closed, or converted to Chapter 7.
Ultimately, whether Chapter 13 fully protects your codebtors depends on the Chapter 13 repayment plan. If the joint debt will be paid in full through the repayment plan, then your creditor has no right to go after your codebtors, since they’ll still get the same amount they were entitled to receive. However, if the repayment plan will only pay a portion of the joint debt, then they may be able to go after your cosigner or joint debtor for the remainder of the balance.
An experienced bankruptcy lawyer can help you find the best plan for your financial situation.
Bankruptcies that involve joint debt are complex, and if you make a mistake navigating this situation, you may jeopardize your financial future or even face legal consequences. The best course of action is to discuss your situation with an experienced bankruptcy attorney who knows the law and can advise you on the pros and cons of each course of action. If you’re considering Chapter 7 or Chapter 13 bankruptcy, schedule a free consultation with Benjamin R. Matthews & Associates today.