Reaching out to a family member or close friend to co-sign on a loan or credit account can be helpful if you don’t have a strong credit history. But it’s essential to understand that a co-signer isn’t merely a reference. They are personally responsible for any portion of the debt that you don’t repay. And just as important, if you file for bankruptcy and succeed in obtaining a discharge, your co-signer remains liable on the debt and their credit report will show any missed payments.

If you are facing bankruptcy and know that you will not be able to make payments on a co-signed loan, it’s critical to inform your co-signer immediately. How the co-signer will be impacted depends on whether you file for Chapter 7 or Chapter 13 bankruptcy.

In a Chapter 7, most of your unsecured debt is wiped out, but a creditor can still go after a co-signer for the balance due on a particular debt. One way of protecting your co-signer is by reaffirming the debt. This means you agree to pay the creditor even though the debt might otherwise have been discharged. You can also seek to make arrangements to pay the creditor part of the remaining in return for their cancelling the co-signer’s obligation. However, the creditor may not agree to such a payment plan if the co-signer has the ability to repay the full amount of the debt. Another alternative is to reimburse your co-signer directly to the extent you can.

In a Chapter 13, your co-signer will be afforded more protection. Upon the filing of a Chapter 13 petition, an automatic co-debtor stay is put into place, preventing creditors from collecting a debt from your co-signer. However, a creditor can request that the court lift the stay in these circumstances:

• The co-signer benefited from the loan.
• The debtor’s bankruptcy plan doesn’t propose to repay the entire debt.
• The creditor would suffer irreparable harm if the stay were to continue.

Once a Chapter 13 repayment plan is put into effect, the co-signer is relieved of responsibility if you have agreed to repay the full amount of the debt. Otherwise, he or she remains liable for any portion not covered in the plan. Since a Chapter 13 repayment plan lasts three to five years, it can allow you more time to pay off the debt in full and so to release your co-signer from their obligation.

If you are overwhelmed by debt and are considering bankruptcy, the Law Offices of James C. Zimmermann is here to help. With offices conveniently located in Hackensack, Vernon, Wayne, Pompton Lakes, and Nutley, New Jersey, we provide effective legal services for all bankruptcy matters. For a free consultation, call 973-764-1633 or contact us online.