The Effects of Bankruptcy on Co-signers and Guarantors

There are many situations in which a person may turn to a co-signer or guarantor in order to secure a line of credit, loan, or another form of financing. For example, if a person is buying a house but cannot qualify for the loan on their own, they may ask a parent to co-sign. Similarly, a spouse may co-sign on a credit card, or a business partner may co-sign on a business loan. When another person guarantees to make the payments in the event that the borrower defaults, they are called the guarantor; this type of relationship is very common in financial transactions that involve borrowing money.

While relying on a co-signer or guarantor is a perfectly legitimate way to secure financing, it’s important to know that there are consequences for both the borrower and the guarantor in the event of a default. Here’s an overview of what you should know about the effects of bankruptcy on co-signers and guarantors, as well as how a bankruptcy attorney may be able to help you understand your options and put your best foot forward.

What Risks Do Cosigners and Guarantors Face?

The most important thing that co-signers and guarantors should know before they put their name next to a borrower is that regardless of what the original borrower does, they are responsible for the debt. This means that if you, the borrower, fail to make payments, then the creditor has every right to go after the co-signer/guarantor for repayment.

How Will My Bankruptcy Impact My Co-Signer or Guarantor?

When you file for bankruptcy, the “automatic stay” is triggered. The automatic stay is a legal pause on a creditor’s ability to collect on the debt, prohibiting the creditor from contacting you about collecting payments while the bankruptcy case is pending. While the automatic stay protects you, it does not protect your co-signers. So, while a creditor may be legally barred from contacting you for repayment, they do have every legal right to go after your guarantor(s). As such, your co-signers will be on the hook for any amount of money owed.

What If My Debt Is Discharged as a Result of Bankruptcy?

Depending on the type of bankruptcy for which you file, your debt may be discharged. Remember, though, that your filing for bankruptcy eliminates your responsibility to pay your debts—it doesn’t have anything to do with the debts and liabilities of any co-signers. Indeed, if you file for a Chapter 7 bankruptcy, your guarantor will receive no protection from creditors before, during, or after the bankruptcy case.

A Chapter 13 bankruptcy, also known as a wage earner’s bankruptcy, on the other hand, may provide some protection. In a Chapter 13 bankruptcy, co-signers and guarantors actually are protected by the automatic stay (although creditors can ask the court to lift these protections). Chapter 13 bankruptcy also results in a repayment plan, giving you time to pay off your debt so co-signers and guarantors aren’t impacted.

Finally, it should be noted that while a co-signer may be on the hook for your debt, your bankruptcy filing won’t have any impact on their credit report. A bankruptcy filing will significantly harm your credit score and may make it difficult to borrow money or secure a loan in the future.

What Should I Do If I Can’t Make Payments on a Debt?

If you are struggling to make payments on a debt and you have a co-signer or guarantor listed on the debt, one of the first things that you should do is talk with them. Remember, if you default on the debt, creditors can go after them and their failure to make payment could impact their credit. By providing them a heads-up, you may be able to get ahead of the problem early.

If making payments feels impossible and bankruptcy feels like the only option, you should also consider debt consolidation, credit counseling, credit negotiation, or loan modification/refinancing. Creditors and lenders want to get paid and are often willing to work with those who are struggling to make repayments to restructure payment or interest amounts.

If bankruptcy truly is your only option, then working with a skilled bankruptcy attorney is strongly recommended. An attorney can help you to exhaust all other options first and also help you to understand the types of bankruptcy and the requirements for filing for different types of bankruptcy. If your co-signers or guarantors have questions about how your bankruptcy may impact them, your attorney can help to provide answers to these questions, too.