Sacramento Bankruptcy Attorney serving Elk Grove considers the situation where co-signers to a loan may be protected in a Chapter 13 bankruptcy

Whenever I go over the advantages of filing a Chapter 13 bankruptcy versus a Chapter 7 bankruptcy, I find clients who are relieved to hear that business associates, personal friends, and family members will not be contacted by creditors to pay off the debt they co-signed for because it is now scheduled for re-payment through a Chapter 13 debt reorganization plan.

One of the “disadvantages” of filing Chapter 7 bankruptcy is, although it liquidates debt for the person filing bankruptcy, it doesn’t also stop the attempts to collect the debt from any co-signer.  And a co-signer is not just “any person” who has signed to back up or guarantee your debt if you don’t pay – a co-signer is someone who is now on the hook to repay the debt, meaning Uncle George or friend Susie is going to start getting creditor phone calls and mail.

There are several ways to handle this awkward situation in which you see to it that your cosigner gets paid.  The simplest is to let the provisions of a Chapter 13 bankruptcy take care of it — where  a co-signer is protected under the following provisions:

• the debt falls under the definition of consumer debt;
• the debt cannot be a business debt, i.e., “incurred in the ordinary course of business”;
• the co-signer cannot “benefit” from the proceeds of the debt; and
• the debtor must carry out the Chapter 13 bankruptcy payment agreement.

The last provision means that if you fail to complete the requirements of your Chapter 13 repayment plan, the creditors may have the right to go after your co-signers for debt repayment.

In summary:  co-signers can be protected in certain bankruptcies. If you have co-signers who need protection from your creditors, discuss this with a bankruptcy attorney who is able to help you determine which bankruptcy filing is best for you.

If you decide to file a Chapter 7 bankruptcy where creditors are able to proceed with collection efforts against your co-signers, there may be other avenues to take to protect them.  Advice from a bankruptcy attorney is especially valuable when other people such as co-signers are involved.

Please contact our Sacramento office serving Elk Grove at 916-313-9069 or via email at info@california-bankruptcyattorney.com.