Filing for bankruptcy protection is often the best choice for those mired in debt. But, it is does not automatically erase every financial obligation. If you have a joint account, or a cosigner, he or she may still be obligated to pay back that debt despite your best efforts.
Your bankruptcy only addresses your liability on debts. A lender is still going to want their money back, and your cosigner or joint account holder is the most likely source of repayment. How much responsibility for your debt your cosigners continue to have depends on whether you file for Chapter 13 or Chapter 7 Bankruptcy.
Chapter 7 Bankruptcy and Cosigners
When you file for Chapter 7 Bankruptcy you enjoy the protection of an automatic stay from pursuit by creditors. Unfortunately, this umbrella does not extend to your cosigners and joint account holders. Creditors remain free to pursue these other parties to collect what is owed.
If you wish to protect your cosigners when filing for Chapter 7 Bankruptcy there are some options to consider.
Pay Off Your Debt
Filing for bankruptcy does not mean you cannot pay off your debt. Paying off a loan, or at least staying current on payments will protect your cosigner as long as that individual debt is in good standing. This is often the easiest way to protect a close friend or family member from being harmed by your bankruptcy.
Reaffirm Your Debt
Often, debts are old and things have changed since the loan was originally created. If you have a debt that you still want to carry after the bankruptcy, attempt to reaffirm the debt without a cosigner is a good option. This is often done with vehicle loans that were originated with a cosigner.
Reaffirming a debt will help your cosigners and joint account holders but it means turning your back on some benefits of the bankruptcy discharge. In some cases, reaffirming debt makes sense, and in others it is better to take the discharge.
Chapter 13 Bankruptcy and Joint Account Holders
By placing a codebtor stay, Chapter 13 Bankruptcy will protect your codebtors while repayment is being made. This gives you an opportunity to restructure your debt and adhere to a plan for repayment without negatively impacting your cosigners.
As long as your repayment plan is being followed and your codebtors are not specifically benefitting from the loan, the stay will protect your joint account holders. If your plan does not include paying off the debt, or you convert from Chapter 13 to Chapter 7, your codebtors can again be exposed to liability.
Special Considerations for Married Codebtors
Depending on the circumstances, a married couple may jointly file for bankruptcy or only one individual may choose to file. The state of Hawaii allows for a couple filing to double the exemptions allowed, so this is a popular choice. If preserving one person’s credit is important to the financial future of the couple, one individual filing may be the best route to take.
It is possible to protect cosigners and joint account holders when filing for bankruptcy protection. It is even possible to protect your spouse. How you choose to do this and which path you take to financial health depends entirely on your individual circumstances. If you have questions about filing bankruptcy or protecting cosigners and joint account holders, contact an experienced attorney today.