Great question. This comes up all the time. The answer depends on which Chapter of Bankruptcy you are filing. In a Chapter 7 proceeding, there is no protection for co-signors as to debts they co-signed with you. Take for instant, a credit card debt that you and a friend are on together as joint account holders. If you file Chapter 7 bankruptcy, in most cases you will discharge the debt you owe the credit card company. Your co-signor will still owe the debt as if nothing has happended. In some respects your co-signor and you are in an adversaral position with each other and only if the co-signor were to challenge your ability to discharge the debt would you possibly not be able to get rid of the debt in Bankruptcy. This happens very rarely and is usually something that comes up when there has been a divorce of the parties and then one of them files Bankruptcy shortly after. Sections 523(a)(5) and 523 (a)(15) deal with domestic relations and divorce type issues that do often come up when a Bankruptcy case is filed.

If you file a Chapter 13 Bankruptcy, the answer is a little more complicated. Section 1301 of the Bankruptcy Code does offer protection to co-signors of a Chapter 13 filer but the protection can be limited depending upon the terms of the Chapter 13 Plan. If the Plan pays 100% of the co-signed debt with a contract interest rate, then the co-signor would be fully protected from the creditor. If the Chapter 13 Plan paid, say 20% of the co-signed debt, then the creditor would be able to go after the co-signor for the remaining 80% of the principal debt plus any lost interest they did not receive in the Chapter 13 Plan. The Bankruptcy Code would require the creditor to obtain relief from the automatic stay protection in order to proceed against the co-signor, however, this would be freely granted by the Court if the Plan does not pay the debt in question with interest in full. The creditor could also simply wait until the Plan was over and then go after the co-signor for any amount of monies they did not receive per the contract, from the Chapter 13 Plan payments.

So, in a nutshell, in most cases being a co-signor is not a good idea and only if the debtor files a 100% payback plus interest Chapter 13 Plan, would the co-signor not be held liable.

David E. Phillips