Crucial Facts about Co-Signed Debts in Bankruptcy

Posted by Kevin on December 19, 2020 under Bankruptcy Blog | Comments are off for this article

Bankruptcy protects you from your co-signed creditor and also from your co-signer.  

Protecting Only Yourself

Assume that you and your co-signer are both legally liable on a debt to a creditor. And you can’t afford to pay the debt.

Let’s focus today on protecting yourself. If you can’t pay the debt, you have to consider two separate obligations—to the creditor itself, and to the co-signer.

Your Obligation to the Creditor

The obligation to the creditor is based on your promise to pay the debt. This obligation can most likely be discharged (legally written off) in a bankruptcy case. The creditor could object to the discharge based on your alleged fraud or misrepresentation, or other exceptions to discharge listed in the Bankruptcy Code. But those objections or exceptions don’t apply to most debts.

Your Probable Obligation to Your Co-Signor

Usually, you have a distinct legal obligation to the other person legally liable on the debt.  What exactly that obligation is depends on the circumstances.

Assume the other person co-signed to enable you to get credit.  You may have entered into an oral or written agreement with the co-signer that if the co-signer ever had to pay the debt, you’d have to pay back the co-signer. Or it could have been something not specifically said or written down, but understood.  In addition,  you could have agreed that if the co-signer were sued, you would be responsible for any costs, like legal fees, incurred by the co-signer in a lawsuit brought by the creditor.

Being Practical

There’s a good chance the creditor is going to pursue whoever is legally liable to it. That would usually be both you and the co- signer. So you need to protect yourself both from the creditor itself and from any potential liability to the co-signer. A bankruptcy would likely discharge both obligations, protecting you from both.

So when you file bankruptcy, it’s critical to list both the creditor and your co-signer on your schedule of creditors. Otherwise you could remain liable to your co-signer after your bankruptcy case is finished if he or she paid off your debt.

Can Your Co-Signer Object?

Just like the creditor, your co-signer could try to object to the discharge of your obligation to him or her. But such an objection would have to be based on your fraud, misrepresentation, or similar bad behavior in the incurring of the debt. As stated above, these objections are rare. The co-signer would have to show that you somehow fooled him or her into being the co-signer. For example, if you had assured her that your credit was good when it wasn’t, or that your income was much more than it really was, those could be valid grounds for objecting to the discharge of your obligation to the co-signer.

If you suspect that a co-signer may object to your discharge (for valid or invalid reasons), explain the situation thoroughly to your bankruptcy lawyer. He or she can access the situation, give you appropriate advice, and, in some cases, can take any appropriate action to minimize your risks.