Protecting Co-Signers In Chapter 13 Bankruptcy

If you’re a debtor who has a secured loan with a co-signer, you may be concerned about how your Chapter 13 bankruptcy will impact the co-signer.  This is especially important if that co-signer is a spouse or other family member who isn’t part of the bankruptcy.

How to minimize the impact of your bankruptcy filing on your co-signer:

Tip #1 – Discuss your bankruptcy plans with your co-signer.  Explain to the co-signer the necessity of your bankruptcy filing and how you intend to do all you can to minimize the impacts the case will have on their finances. What you don’t want to do is let the bankruptcy come as a surprise to the co-signer.

Tip #2 – If the co-signed loan is on a home or car, you may want to consider selling the property if it will lessen the co-signer’s financial burden. For example, if selling your car will help pay off the entire loan, then selling it may be the best solution for protecting both yourself and the co-signer.

Tip #3 – If you decide not to sell your property and want to repay the loan in Chapter 13 bankruptcy instead, you may be able to “cram down” the loan. For example, if you have a car which is only worth $20,000 and there is a $25,000 loan on it, you may be able to discharge that additional $5,000. However, if you do that, your co-signer will probably face liability for the discharged $5,000 after your bankruptcy. If this is your plan, let your co-signer know.

Tip #4 – Finally, you could request that the bankruptcy trustee allow you to pay off the full amount of the co-signed loan in Chapter 13 bankruptcy. You can also request that the loan receive priority payment status; but it’s not guaranteed that the bankruptcy trustee will grant this request. Of course paying the full amount of the loan in bankruptcy will fully protect your co-signer; but it may not benefit you financially.