How filing for bankruptcy affects your co-signer or spouse
Joint debts, including joint accounts and accounts with co-signers, can make filing for bankruptcy significantly more complicated. What happens to joint debts in bankruptcy depends on the type of debt, the type of bankruptcy, and the steps you take during the bankruptcy process.
Here’s what you need to know about joint debt in bankruptcy. For more information, check out attorney Ben Matthews’ podcast, Debt Sucks.
What counts as joint debt for bankruptcy purposes?
A joint debt is any debt where more than one person is responsible for repayment. This may include joint credit cards, mortgages, car loans, and any other type of debt with multiple account holders. Essentially, if the bill for the account goes to more than one person, it’s joint debt. Note that it doesn’t matter whose name is first or second on the bill; both are considered responsible for the debt. The other person on your joint account may be a co-signer or joint account holder; for purposes of this article, we’ll refer to this person as your codebtor.
It’s important to note that an account with an authorized user is not a joint debt. An authorized user is allowed to use someone else’s credit card, but the account holder is solely responsible for repayment. Filing for bankruptcy won’t make any authorized users on your accounts responsible for repayment, although it can affect their credit scores, so it’s important to check with a bankruptcy lawyer first.
What happens to joint debt in Chapter 7 bankruptcy?
If you file for Chapter 7 bankruptcy and your co-debtor doesn’t, then the court will enter an “automatic stay” that protects you—and only you—from collection action. That means the creditor can’t go after you to repay the debt, but they can and probably will go after your codebtor.
Likewise, when your Chapter 7 bankruptcy is finalized and your debts are discharged (eliminated), any joint accounts are only discharged with respect to you. Any codebtors become responsible for the full balance on each joint debt. This can have significant effects on your codebtor’s credit score as well as their overall financial situation.
In short, if you have joint debt, filing for Chapter 7 can be really damaging to your codebtor(s). One option to avoid this problem is to reaffirm the debt, meaning you sign a separate agreement with the creditor to remain responsible for the joint debt even after bankruptcy. Another option is to file for Chapter 13, which handles joint debt differently.
What happens to joint debt in Chapter 13 bankruptcy?
When you file for Chapter 13, the court will not only enter the automatic stay that protects you from collection action, but also a “codebtor stay” that prevents creditors from collecting from your co-signers or joint account holders, as long as the joint debt is included in the Chapter 13 repayment plan.
The codebtor stay remains in effect throughout the length of the Chapter 13 repayment plan, typically three to five years. If you fully repay the joint debt through the Chapter 13 process, then your creditor has no right to go after your codebtor—after all, they have been repaid in full already. However, if some portion of the joint debt remains after the Chapter 13 repayment plan is complete, your creditor can still go after your codebtor for the remaining balance.
Talk to an experienced bankruptcy lawyer about your joint debt
There is no single answer to how to proceed with the bankruptcy process when you have joint debt. It depends on the type of debt, the amount of joint debt vs. individual debt you have, whether your codebtor is your spouse or someone else, and many other factors. That’s why it’s important to work with an experienced bankruptcy attorney who will listen to your story and explain your legal options so you can make an informed decision.
Don’t let overwhelming debt control your life. It’s time for a fresh start. Give us a call or contact us online for a free consultation with a bankruptcy attorney at Benjamin R. Matthews & Associates, LLC.
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