Will Bankruptcy Affect Co-Signers On Loans?

Will filing for bankruptcy affect a co-signer on a loan? The short answer is yes. When you file for bankruptcy, an automatic stay goes into effect against your creditors. As a result, creditors affected by the stay may attempt to collect the debt from any co-signers. This is the reason it is recommended that you warn any co-signers before filing for bankruptcy protection if you value the relationship.

In limited circumstances a stay can protect a co-signer. Co-signors are never protected in a Chapter 7 bankruptcy. However, in a Chapter 13 bankruptcy filing a Co-Debtor Stay goes into effect prohibiting any attempt by a debtor’s creditors to collect from co-signers. This stay operates where the co-debtor provided some security for the loan and is limited to consumer debts and to co-debtors who did not become obligated through the ordinary course of business. However, the stay is limited because it automatically ends if the bankruptcy is closed, dismissed or converted to another Chapter. The bankruptcy court can also lift the stay for various reasons including harm to a creditor or if the Chapter 13 repayment plan does not provide for full payment of the debt. Regardless of the limitations, a Chapter 13 filing is the best option if you want to keep your creditors from taking action against a co-signor.