Filing for bankruptcy is a big decision that should not be taken lightly. There are several issues to consider before deciding to file for debt relief. One question that should be asked is whether any of the debtor’s debt has authorized users or co-signers attached to it.
A co-signer is someone who promises to be liable for the debtor’s debt obligations if the debtor fails to pay. For example, a father who co-signs for his daughter’s apartment while in college is liable for any unpaid rent just as the daughter is.
Because the co-signer acted as a guarantor, the co-signer is liable for the debt and the creditor may go after the co-signer if the primary borrower files for bankruptcy or fails to make payments. In the case of a bankruptcy filing, although the primary borrower’s bankruptcy will not appear on the co-signer’s credit, the co-signer will be responsible for paying what is owed.
If the primary borrower files for Chapter 13 bankruptcy, the co-signer of any consumer debt is protected from any collection efforts by creditors. The co-signer is protected by the Codebtor Stay under §1301 of the United States Bankruptcy Code which automatically requires all creditors to suspend the collection efforts of any Codebtors once the primary borrower files for bankruptcy.
On the other hand, an authorized user will not be responsible for the debt on the borrower’s account if the borrower files for bankruptcy. A parent may make their child an authorized user on their credit cards. An authorized user is someone allowed to access and use the account holder’s account. If the account holder files for bankruptcy, the creditor’s sole remedy is to go after the borrower because the authorized user never guaranteed payment to the creditor.
Co-signers must be sure they can repay a debt. Creditors typically ask for co-signers when a borrower’s creditworthiness is uncertain. The co-signer gives the creditor added security that the creditor will recoup the loan. As a result, be assured that creditors will go after co-signers when the loan goes into default.
Bankrupt debtors should understand that filing for bankruptcy with co-signers attached to some or all of the debt will complicate matters. Co-signers are not protected under Chapter 7 bankruptcy filings. Thus, the debtor may want to pursue Chapter 13 bankruptcy if there are numerous debts with co-signers who will be adversely affected by a Chapter 7 filing.