Filing for Chapter 13 bankruptcy can significantly impact your finances and, importantly, the financial well-being of your cosigners. Understanding the implications for your cosigner is crucial before proceeding with this legal action. This post will explore what happens to a cosigner when the primary borrower files for Chapter 13 bankruptcy, addressing common concerns and providing clarity on the process.
What is Chapter 13 Bankruptcy?
Before delving into the cosigner's role, let's briefly define Chapter 13 bankruptcy. It's a form of bankruptcy that allows individuals with regular income to repay their debts over a period of three to five years through a court-approved repayment plan. This plan, meticulously detailing debt repayment, is submitted to the bankruptcy court for approval. Unlike Chapter 7, which involves liquidation of assets, Chapter 13 aims for debt reorganization and eventual discharge.
Does Filing Chapter 13 Affect My Cosigner?
The impact on your cosigner depends heavily on the type of debt involved and the terms of the original agreement. Here's a breakdown:
Secured Debts (e.g., Auto Loan, Mortgage)
With secured debts, the creditor holds collateral—your car or house, for instance. If you default on payments, the creditor can repossess the collateral. In a Chapter 13, the creditor can't pursue your cosigner while the bankruptcy plan is in place. The repayment plan addresses the debt, providing a structured repayment method. However, if you fail to make the payments outlined in your Chapter 13 plan, the creditor could eventually pursue your cosigner after the bankruptcy is discharged or dismissed. This is why it's vital to diligently adhere to your Chapter 13 plan.
Unsecured Debts (e.g., Credit Cards, Medical Bills)
For unsecured debts, there's no collateral. Your cosigner is equally responsible for repayment. Filing Chapter 13 generally protects your cosigner from immediate collection actions during the bankruptcy process. However, similar to secured debts, if the Chapter 13 plan fails, your cosigner could become fully liable for the remaining debt.
Will My Cosigner Be Notified of My Chapter 13 Filing?
While your cosigner isn't typically directly notified of your Chapter 13 filing, the creditor is. The creditor will likely be aware of the bankruptcy and will adjust their collection efforts accordingly, at least for the duration of the plan.
Can My Cosigner Remove Themselves from the Debt?
This depends entirely on the loan agreement and the creditor's willingness. Generally, there's no mechanism within the bankruptcy process itself that allows a cosigner to be removed from the debt.
What Should My Cosigner Do if I File for Chapter 13?
Your cosigner should:
- Monitor the situation: Keep an eye on the progress of your Chapter 13 case.
- Maintain communication: Stay in contact with you to understand the plan's progress.
- Review their credit report: Regularly check their credit report for any negative impacts.
- Consult with a financial advisor: Seeking professional advice can help navigate this complex situation.
Is it Always Bad for a Cosigner if the Primary Borrower Files Chapter 13?
While it can be stressful, a Chapter 13 filing doesn't automatically spell disaster for a cosigner. It offers a period of protection and provides a structured repayment plan that could prevent complete default. However, success depends on the borrower's adherence to the plan.
Disclaimer: This information is for educational purposes only and does not constitute legal advice. You should consult with a qualified bankruptcy attorney and financial advisor for personalized guidance regarding your specific situation. The laws concerning bankruptcy and cosigners can be complex and vary by jurisdiction.
