Chapter 7 bankruptcy helps you protect your co-signer, mostly by discharging your other debts so that you can pay the co-signed one.
Last week we wrote about protecting yourself from both your co-signer and from the creditor owed the co-signed debt.
If you decide to file bankruptcy you want to discharge (legally write off) all the debts that you can. Then you can—if you want and are able to—pay any obligation you feel morally compelled to. Especially if you’re no longer friendly with your co-signer you want to end any legal liability you may have to him or her. And you want to end the legal liability you have to the creditor itself. So you legally discharge those two obligations to protect yourself.
But now let’s focus on protecting the co-signer. Let’s assume that you feel very strongly about doing all you realistically can do for that person. You want to do what you can to prevent the creditor from coming after him or her. Or if your co-signer has already paid part or all of the debt, you’d like to make your co-signer whole. How could bankruptcy help in this?
Chapter 7 and Chapter 13 each have advantages and disadvantages in protecting your co-signer. We start today with Chapter 7.
How Chapter 7 Helps
Chapter 7 “straight bankruptcy” helps mostly indirectly. Filing this type of bankruptcy would discharge all or most of your other debts. That should make it at least somewhat easier to pay the co-signed debt if you wanted to.
Be sure to list both your original creditor and its co-signer on your bankruptcy schedules. Do so both because you are required by law to list all creditors and it’s prudent to cover those distinct obligations. You owe the creditor based on your debt agreement. You likely owe your co-signer based on whatever agreement you have with him or her, oral or otherwise. Both obligations would very likely be discharged in your Chapter 7 case. (This assumes that there is no fraud-based objection by either). So you would very likely have no legal obligation to pay either of them.
Protecting Your Co-Signer through Chapter 7
The discharge in Chapter 7 happens quite quickly—usually within about four months from filing. So then IF and WHEN you wanted to, you could start making the monthly payments to the co-signed creditor. If your co-signer had started making these payments, you could informally consent to start making them again.
Your legal obligation to pay this would by this time have been discharged in bankruptcy. You certainly don’t want to create a new legal commitment. So you should make clear that you are paying strictly voluntarily.
If your co-signer has already paid the entire debt you could similarly consent to reimburse him or her.
The same applies if the co-signer has paid part of the debt. You could arrange to make the remaining payments directly to the creditor, and then work on reimbursing the co-signer through payments afterwards—or whenever you wanted.
Again, in all situations make clear that whatever you choose to pay is strictly voluntary.
No Legal Constraint on Paying This Debt
One advantage to Chapter 7 regarding a co-signed debt is the flexibility it gives you to pay the debt. As Section 524(f) of the U.S. Bankruptcy Code makes clear, nothing “prevents a debtor from voluntarily repaying any debt.”
Because Chapter 7 is such a short procedure there is nothing preventing you from paying a discharged debt. In contrast, a Chapter 13 case usually last 3 to 5 years, during which time you are in a formal payment plan. During that period of time you can’t favor any creditors except as the law specifically allows you to do.
Nevertheless, Chapter 13 does give you other advantages with co-signed debts, which we’ll get into next week.