How Bankruptcy Affects Co-Signers in New Jersey: Key Facts You Need to Know
The Impact of Bankruptcy on Co-Signers
Bankruptcy can be a powerful tool for managing debt. It can help you eliminate certain debts or create a structured repayment plan that allows you to pay up your debts over time.
However, despite its benefits, bankruptcy can sometimes have certain unexpected consequences for the parties involved. If you are considering bankruptcy and someone else has co-signed some or all of your debt, your bankruptcy filing could also affect them, depending on the circumstances.
Before filing, it’s important to understand how bankruptcy affects both you and anyone who has helped secure your loans. That way, you can take steps where possible to minimize the effects of the process and avoid unintended consequences.
At the Law Offices of Wenarsky and Goldstein, LLC, we guide clients through the bankruptcy process and help them understand their rights and options. We can provide clarity and guidance before, during, and after bankruptcy to help you make informed decisions every step of the way.
Read on as we discuss how different types of individual bankruptcy impact co-signers and the options available for those involved.
Who Is a Co-Signer?
A co-signer is someone who agrees to take legal and financial responsibility for a loan if the primary borrower can’t make payments. This is common when someone has a limited credit history or a low credit score. By co-signing, they help the borrower qualify for the loan by guaranteeing repayment.
Co-signing a debt isn’t just a formality; it comes with real financial risks. A co-signer is just as responsible for the debt as the borrower. If the borrower misses payments, creditors may come after their co-signers for the remaining balance. This can lead to legal action, wage garnishment, or collection efforts against the co-signer.
Co-signers are often close family members or trusted friends who step in to help their loved ones in need. While their intention is to provide support, they may not fully realize the financial risks involved. If the borrower files for bankruptcy, the co-signer could be left with unexpected debt, which may strain relationships and create serious financial hardship. If you’re filing for bankruptcy, you might not want to expose your loved ones to such liability, which is why it is important to carefully consider your options before moving forward.
Different Types of Individual/Consumer Bankruptcy and Their Impact on Co-Signers
Generally, the impact of bankruptcy on a co-signer depends on the type of bankruptcy filed. The two primary types for individuals are Chapter 7 and Chapter 13, and each affects co-signers differently.
Chapter 7 Bankruptcy and Co-Signers
Chapter 7 bankruptcy is designed to eliminate unsecured debts, such as credit cards and medical bills, by liquidating the debtor’s non-exempt assets (assets that are not protected by law). The funds from the asset liquidation are used to pay off creditors as much as possible, after which any unsecured debts left can be discharged (exclusive of certain types of debt like taxes and child support).
When a debtor receives a Chapter 7 bankruptcy discharge, they are no longer legally required to repay the debt. However, while this can provide financial relief for the borrower, it does not erase the co-signer’s responsibility for the debt. The lender/creditor can still demand full payment from the co-signer. If the co-signer cannot pay, their credit score could take a hit, and they may face aggressive collection efforts, lawsuits, or even wage garnishment.
To reduce the impact on co-signers, debtors may consider:
- Reaffirming the Debt: This means agreeing to continue making payments despite filing for bankruptcy. While this can protect the co-signer, it also keeps the borrower on the hook for repayment.
- Voluntarily Repaying the Debt: Even after receiving a discharge, the borrower can choose to pay off the loan to prevent the co-signer from being pursued by creditors.
If you’re considering Chapter 7 bankruptcy, openly discussing the potential risks with your co-signers before moving forward can help you prepare them for the worst-case scenario and preserve your relationship with them.
Chapter 13 Bankruptcy and Co-Signers
Chapter 13 bankruptcy allows debtors to restructure their debts and repay them over a three- to five-year period. Unlike Chapter 7, this form of bankruptcy offers more protection for co-signers through a co-debtor stay, a legal provision that temporarily prevents creditors from collecting from a co-signer while the repayment plan is in effect.
However, this protection is not absolute. If the debtor fails to keep up with the repayment plan, creditors can still pursue the co-signer for the remaining balance. Additionally, the co-debtor stay only applies to consumer debts, such as personal loans and credit cards. It does not cover business debts, tax obligations, or certain secured loans, meaning co-signers on those types of debts can still face collection efforts even during bankruptcy.
Debtors who want to protect their co-signers under Chapter 13 can:
- Include the co-signed debt in the repayment plan, ensuring it is paid off over time to reduce the co-signer’s financial burden.
- Remain committed to the repayment schedule to prevent creditors from taking action against the co-signer.
Because Chapter 13 allows borrowers to gradually pay back their debts, it is often a better option for those who want to shield their co-signers from financial hardship. However, only those who earn a regular income and have enough disposable funds to commit to the repayment plan qualify for this type of bankruptcy. Other debtors who do not meet this requirement might need to consider filing under Chapter 7.
Will Filing for Bankruptcy Hurt My Co-Signer’s Credit?
Filing for bankruptcy doesn’t automatically lower your co-signer’s credit score.
However, if you stop making payments during or after bankruptcy and your co-signer doesn’t cover them, the lender will likely report the missed payments to credit bureaus. This can lower your co-signer’s credit score and make it harder for them to get new credit. But if they continue making payments, their credit score will likely stay intact.
If you’re considering bankruptcy and have a co-signer, it’s important to talk to them about the potential impact. Planning ahead can help protect both of you from unnecessary financial hardship.
Contact the Law Offices of Wenarsky and Goldstein, LLC, for More Bankruptcy Assistance
Bankruptcy doesn’t just affect the person filing. It can have serious financial consequences for co-signers as well since they can still be held responsible for the debt.
Understanding your rights and options is crucial if you are considering bankruptcy and you have a co-signed loan or if you’ve co-signed a loan and the borrower files for bankruptcy.
At the Law Offices of Wenarsky and Goldstein, LLC, we can help you understand your rights and obligations as a debtor or co-signer under Chapter 7 and Chapter 13 bankruptcy.
We also provide insights on topics such as what to expect when applying for mortgages after bankruptcy to help you plan ahead and protect your financial future.
If you’re considering bankruptcy and want to understand its full impact, we’re here to help. Contact the Law Offices of Wenarsky and Goldstein, LLC today for a consultation.
Call the Law Office of Wenarsky & Goldstein
At the Law Offices of Wenarsky & Goldstein, LLC, our New York and New Jersey attorneys are experienced and knowledgeable in bankruptcy, estate planning and probate, guardianship, special needs planning, and real estate law. To learn more about how we can assist you with your legal needs, call us today at 973-453-2838.
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