When the Primary Borrower Files Bankruptcy
If the primary borrower files Chapter 7 and receives a discharge, their obligation on the cosigned debt is eliminated. However, your liability as cosigner remains fully intact. The creditor will come directly to you for 100% of the remaining balance. The discharge only protects the person who filed -- not their cosigner.
This is one of the most devastating consequences of cosigning. The person you helped gets debt relief while you're stuck with the entire balance. There's no legal mechanism to shift the borrower's discharged liability back to them.
Chapter 13 Codebtor Stay
Chapter 13 provides a unique protection: the codebtor stay (11 U.S.C. 1301). When the primary borrower files Chapter 13, creditors cannot pursue the cosigner on consumer debts as long as the debtor proposes to pay the debt through the plan. This protection lasts for the duration of the 3-5 year plan.
However, the codebtor stay has limits. It doesn't apply to: business debts, debts where the cosigner became liable in the ordinary course of business, or situations where the debtor's plan doesn't propose to pay the cosigned debt. Creditors can also file a motion to lift the codebtor stay.
When the Cosigner Files Bankruptcy
If you as the cosigner file bankruptcy, your liability is discharged but the primary borrower remains liable. This may be necessary if the primary borrower defaulted and you can't afford the payments. Your bankruptcy filing doesn't appear on the primary borrower's credit report -- only yours.
Before filing bankruptcy solely because of cosigned debt, explore other options: cosigner release, refinancing, or negotiating a settlement. Bankruptcy affects your credit for 7-10 years. If the cosigned debt is your only significant liability, the other options may be preferable.
Frequently Asked Questions
If I cosigned a student loan and the borrower files bankruptcy, am I protected?
No. Student loans are generally not dischargeable in bankruptcy (with limited exceptions under the Brunner test). Even if the borrower files bankruptcy, neither the borrower's nor the cosigner's liability is typically discharged. Both remain liable unless the borrower proves undue hardship.
Does the codebtor stay apply to all cosigned debts?
Only to consumer debts in Chapter 13. Business debts, debts incurred in the ordinary course of business, and certain other categories are not covered. The stay also only lasts during the Chapter 13 plan period -- typically 3-5 years.
Can I file bankruptcy just to discharge a cosigned debt?
Yes. You can list the cosigned debt in your bankruptcy. If you file Chapter 7 and receive a discharge, your obligation as cosigner is eliminated. The primary borrower remains liable. This may be the only practical option if the debt is large and the primary borrower has defaulted.
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