From time to time I run into a person (we'll call him Bob) who has a loan which was co-signed by someone, usually a parent (we'll call the co-signer Mom). So, what happens if Bob files bankruptcy?
Well, if the debt is unsecured, in a chapter 7 Bob's debt is wiped out but the co-signer is still liable for the debt. After the bankruptcy is filed, Bob is free to pay the debt if he wants to, or he is free to give money to Mom and Mom can pay the debt. But the lender is free to try to collect from Mom in the meanwhile.
But in a chapter 13, there is something called "the co-debtor stay" for consumer loans (11 U.S.C. Sec. 1301). What that means is that if Bob got the benefit of the loan, and if Bob promises to pay the co-signed debt in full through the chapter 13, the lender has to sit back and accept payments and leave the co-signer alone.
On the other hand, if Bob does not pay the co-signed debt in full, the lender can ask the court for permission to go after the co-signer.
The real moral of the story is: Don't co-sign for someone else's loan. If you refuse to do so, you won't have to worry about the co-debtor stay!
As always, if I can be of help, call me at 320-252-4473.
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