What Happens to Co-debtors in Bankruptcy

: Chris Lee Law Firm

  Filed under: Debt

co signerHaving a co-debtor situation usually occurs when one person’s income is not enough for the loan. The co-signer lends their name to the loan as an assurance that the debt will be paid.

When you have a co-debtor for a loan and the original signer defaults on the loan, the co-debtor becomes responsible for the debt. This could include grown children, ex-spouses or ex-business partners.

Even if you have it on your divorce agreement or business contract who pays what, you are still responsible for paying if the other party stops paying or has their debt discharged through bankruptcy.

Chapter 7 Bankruptcy

If you file a chapter 7 bankruptcy, the liquidation bankruptcy, your legal obligation to pay on the debt will be discharged, however, the co-debtor will remain responsible for the debt.

Chapter 13 Bankruptcy

If you file a chapter 13 bankruptcy, the reorganization bankruptcy, your debtors cannot contact you or your co-debtor for payments. If at the end of the bankruptcy, and the debt that was co-signed is not paid in full by the trustee, the balance of the debt may be turned over to the co-debtor for payment.

Small Business Loans

When you co-sign on a small business loan and most other commercial loans, you will each be responsible for 100% of the loan. So if your business partner files for bankruptcy, you will be left as the sole guarantor of the entire outstanding balance.

If you are considering filing bankruptcy, or if someone you cosigned for has filed for bankruptcy protection, it is in your best interest to talk to a Dallas bankruptcy attorney to find out how to protect yourself and what your legal options are.

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