It’s very common for people to be jointly liable for debt as co-signers. For example, students going to college often require their parents, or another adult, to be a co-signer in order to be approved for a student loan. People who do not have a great credit history may need someone to co-sign on other types of loans like home mortgages, car loans, or personal loans in order to be approved for financing. It’s also common for married couples to be jointly liable for other debts such as credit card and medical debt.
Failure to pay these debts gives the creditors the right to pursue the debt against either “co-debtor” individually, or jointly, by any means legally available, such as bringing a lawsuit, garnishing their wages, and placing a judgment lien on their property.
When a person files for bankruptcy, and gets a discharge, they are no longer legally liable for their debts, with certain exceptions (i.e. domestic support obligations, most tax debt, and student loan debt). This means that creditors are legally prevented from sending bills to the debtor, calling the debtor, suing the debtor, or taking any action, whatsoever, to collect on the debt after the debtor receives their discharge. Creditors who continue to take such debt collection actions are subject to being held in “contempt of court” and may be sanctioned by the court (usually in the form of a monetary penalties). Notably, bankruptcy does not get rid of valid liens, so creditors may still exercise their right to repossess or foreclose upon property, such as cars and homes, to which the debt is secured, if the debtor fails to continue making payments on the debt after discharge. It’s also important to understand that this protection actually begins from the very day that the debtor files their bankruptcy case. This is because the bankruptcy court’s “automatic stay” goes into effect immediately upon the filing of the bankruptcy case, which legally prohibits all further debt collection actions against the debtor during the course of their bankruptcy case. Creditors are subject to sanctions for violating the stay without court permission to do so, which is only allowed under certain limited circumstances.
When a person files for bankruptcy, any co-debtors will continue to remain liable and legally responsible for the entire amount of the joint debt owed. Therefore, creditors will generally still be allowed to take action to collect on the debt against the co-debtors, even after a bankruptcy case has been filed, and after discharge. There are some exceptions to this rule. Married couples who have shared debts are allowed to file a single joint case together, in which case the automatic stay and discharge protects both spouses from creditors. Also, unlike in a chapter 7 bankruptcy case, co-debtors are fully protected from creditors by the automatic stay during their chapter 13 case. However, once the chapter 13 case is completed (discharged or dismissed), those same co-debtors lose all protection against creditors. Without the protection of the automatic stay, the co-debtor must continue to make payments on the debt in order to avoid negative credit reporting and other collection efforts that may be taken by the creditor. This is also true if the joint debt is secured by a home or vehicle that the co-debtor wishes to keep and avoid repossession or foreclosure. Co-debtors must be listed in the bankruptcy petition that is filed with the court and will receive formal notice from the court that the case has been filed. For this reason, it is often a good idea to inform a co-debtor who is a friend or family member that you intend to file bankruptcy so that they are not surprised when they receive the formal notice.
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This is a general overview of how filing for bankruptcy impacts co-debtors. If you are considering filing for bankruptcy, and have other people whom are jointly liable for your debts, you should discuss your case with an experienced bankruptcy attorney to ensure you get the best advice on how your bankruptcy will affect those co-debtors. See us at LifeBackLaw.com!
