When you want to file for bankruptcy, you’ll need to take a number of important factors into consideration, like the impact it can have on your credit score or the property you could risk. However, if you have co-signed debt, you’ll also need to consider how it will impact the individual who signed with you. Unfortunately, bankruptcy does not offer many protections for co-signers. However, there are steps you can take to help protect the individual during this process. The following blog explores what you should know about these matters, including the importance of working with a Montgomery County bankruptcy lawyer to explore your legal options. Understanding what happens to co-signed debts during both Chapter 7 and Chapter 13 bankruptcy is critical to avoid exposing a co-signer to collection efforts and long-term consequences.

Are Cosigners Protected by the Automatic Stay in PA?

When an individual declares bankruptcy, they will receive an immediate and powerful protection, known as the automatic stay, that prevents creditors from continuing collection efforts, including lawsuits, wage garnishments, and foreclosure. While the filer can receive these important benefits, it’s important to understand that this does not automatically extend to co-signers. Whether or not your co-signers have protection under the automatic stay is dependent upon the type of bankruptcy filed.

It’s important for filers in and around Montgomery County, in communities like Blue Bell and Norristown, that bankruptcy filings are handled through the U.S. Bankruptcy Court for the Eastern District of Pennsylvania, which will be responsible for overseeing and handling your bankruptcy case. While the court serves the Eastern Pennsylvania district, it will apply the same federal bankruptcy laws imposed across the country.

Chapter 7 Bankruptcy and Co-Signers

During a Chapter 7 bankruptcy, a Pennsylvania co-signer will receive no protection from creditors. As such, it’s important to consider:

  • Creditors can immediately pursue the co-signer
  • Discharges apply only to the filer
  • Lawsuits, collection efforts, and wage garnishment may shift to the co-signer

Chapter 13 Bankruptcy and Co-Signers

With Chapter 13, your co-signer will have more protection. When pursuing Chapter 13, you’ll receive an automatic stay for the entirety of the time it takes you to complete your three- to five-year repayment plan. As such, your co-signer may be eligible for a co-debtor stay. However, it’s important to note:

  • Protection only lasts for the duration of the bankruptcy plan
  • This only applies to consumer debts, not business liabilities
  • If the debt is paid in full throughout the repayment plan, the co-signer is protected
  • Creditors may still petition the court to lift the automatic stay

Can Creditors Collect From a Co-Signer After Discharge?

When a filer successfully completes a bankruptcy plan, they will have their eligible debts discharged. This means they are no longer legally responsible for making these payments, though the debt itself will still exist. As such, the creditor may then legally pursue anyone else who has an obligation to the debt, like a co-signer.

Financial Risks for Co-Signers

  • Full remaining balance becomes their legal responsibility
  • Credit scores may be damaged by missed payments
  • Wage garnishment may occur if a judgment is obtained
  • There is the potential for lawsuits
  • May strain personal or family relationships

What Can I Do to Protect Someone Who Co-Signed Debt for Me?

If you need to file for bankruptcy but worry about what will happen to your co-signer, it’s important to understand the steps you can take to protect them from creditors. There are different strategies you may be able to utilize, depending on the Chapter filed.

Protection Strategies

  • File Chapter 13 and pay the co-signed debt in full during your plan
  • File Chapter 7 and reaffirm the debt
  • Continue making voluntary payments (though you are not legally required to do so)
  • Refinance debt into your sole name before filing when possible
  • Inform your co-signer before filing so they may adequately prepare

Chapter 7 Reaffirmation

  • Reaffirming the debt ensures you remain legally responsible for repayment
  • This can prevent creditors from pursuing your co-signer
  • This must first be approved by the bankruptcy court
  • Can increase your risk in the event you default on payments

Chapter 13 Repayment

  • A co-signed debt may be prioritized when creating a repayment plan
  • The plan must be properly structured
  • Prioritizing a co-signed debt may increase your monthly payments
  • Paying in full can protect the co-signer

Should You Tell Your Co-Signer Before Filing for Bankruptcy?

Though telling someone you plan to file for bankruptcy can be anxiety-inducing, it’s all the most important to do so if they have co-signed a debt on your behalf. By informing them of your impending case, this allows them adequate time to prepare. Failure to inform a co-signer about your case can:

  • Damage personal relationship
  • Cause avoidable credit damage
  • Expose them to immediate credit collection efforts
  • Prevent them from financially preparing

What to Discuss With a Co-Signer

  • What chapter you plan on filing
  • Whether or not you plan to reaffirm the debt
  • The potential impact on their credit
  • What debts you plan to include
  • The timeline for potential creditor action

How Do Co-Signed Debts Impact Credit Scores in Pennsylvania?

Though you eliminate your legal obligation to repay a debt through bankruptcy, the account may remain active if there is a co-signer on the account. As such, this can result in the account appearing as delinquent on the co-signers credit score. This applies regardless of where the co-signer resides, though consumers in Pennsylvania frequently report these credit impacts while a Chapter 7 or Chapter 13 case is pending.

Potential Consequences for Co-Signers

  • Missed payment reported under their name
  • Loan denial
  • Increased interest rates
  • Increased debt-to-income ratio
  • Long-term negative marks against credit

Contact an Experienced Montgomery County Bankruptcy Attorney

When you are considering bankruptcy, regardless of whether or not you have a co-signer on certain debts, the most important thing you can do is connect with an experienced bankruptcy attorney. At Mudrick & Zucker, P.C., our team understands how complicated these matters can be. That is why we are committed to fighting for you. Contact us today to learn more.