What Happens to Joint or Co-Signed Debt in a Bankruptcy?

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Many Americans today are dealing with some form of joint debt, whether it be through marriage, or through helping a family member or close friend in a financial bind. While it’s wonderful to be able to help out a loved one, too many people are more than willing to sign on the dotted line without a complete understanding of what exactly it means to be a co-signer or guarantor. Oftentimes, these are the people who end up completely blindsided if and when one of their co-debtors files for bankruptcy.

Luckily, there are things that can be done to protect those people who are so willing to open their hearts (and apparently, their wallets, too) and put their name onto someone else’s debt simply to make things easier for a person they care about.

If the main debtor is the person to file bankruptcy, do lenders have the right to go after the co-debtor in order to collect the debt? Actually, they do.

Filing for bankruptcy can only ever discharge one person’s debt at a time, leaving any co-debtors 100% liable for mutually owed monies.  However, anyone with half a heart and conscience would naturally want to protect the person who was so willing to step forward when he or she needed assistance borrowing money or making a significant purchase.

One thing that a debtor can do is reaffirm the debt himself. By doing so, he is stating full intention to continue to repay the debt, even after the bankruptcy case is finalized. This ensures that any co-debtors won’t have to deal with collections agencies knocking at their doors. The downside to this solution is that reaffirming a debt means that the debtor must repay the debt in full, even if the item in question becomes damaged or destroyed at some future time.

Perhaps a slightly safer alternative would be to include the co-signed debt into the bankruptcy petition in order to have it discharged with the rest of the money that is owed to various lenders. By collaborating with any co-debtors throughout the entire process, his or her worries can be put to rest by the reassurance that the main debtor will continue to pay off the debt even after the bankruptcy. Any debtor has the choice to continue to pay on debts after a bankruptcy. Most people don’t make a habit of this, being that the goal of filing for bankruptcy is to rid oneself of any responsibility to all monies owed. However, since a majority of his debts will be erased, it may then become possible for the debtor to continue making payments on the co-signed debt so that his co-debtor doesn’t have to get involved.

If your relationship with the co-debtor is complex and volatile, such as with an ex-spouse, we may advise you to file for Chapter 13 Bankruptcy. If you would like to share the specific details of your situation with us, we can easily advise you of the best way to handle joint and/or co-signed debt during a Chapter 7 or Chapter 13 Bankruptcy matter. Simply contact us today at Veitengruber Law to learn how we can help.

Image credit: Mark Morgan

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4 Responses to What Happens to Joint or Co-Signed Debt in a Bankruptcy?

  1. Pingback: Child Support and Bankruptcy: What You Need to Know | Veitengruber Law

  2. Pingback: NJ Foreclosure – What is a Deficiency Judgement? | Veitengruber Law

  3. Pingback: I’m Married; Can I File for Bankruptcy Without my Spouse? | Veitengruber Law

  4. Pingback: I Co-Signed a Loan that Defaulted; What are My Rights? | Veitengruber Law

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