Chapter 7 Bankruptcy: What Happens to Cosigned Debts?

When you’re struggling with debt and considering Chapter 7 bankruptcy, you may worry about how it could impact the people who’ve helped you along the way. So if you have a cosigned loan or debt, it’s important to understand how Chapter 7 and cosigners could affect each other.

What will happen to them if you decide to file for Chapter 7? Do they have to know about it or be involved? And how can you protect them?

As a Memphis bankruptcy lawyer, I can help you with the ins and outs of filing Chapter 7, even with cosigned debts.

Understanding Cosigned Debts

A cosigner is someone who agrees to be responsible for paying off a debt if you can’t. This person has essentially promised the lender they’ll step in if you’re unable to make payments.

Cosigners are often close family members or friends who want to help you secure a loan. By cosigning, they take on responsibility for the debt alongside you. And that means their financial responsibility doesn’t go away when you file for bankruptcy.

How Chapter 7 Bankruptcy Affects Your Cosigner

Filing for Chapter 7 bankruptcy discharges your unsecured debts, so you’re no longer legally required to pay them. This can give you a fresh start and allow you to rebuild your finances without the burden of overwhelming debt.

However, this discharge only applies to you—not your cosigner.

The lender can go after your cosigner for the remaining balance, and they’ll be responsible for paying it off. This could lead to financial strain on them, which is why it’s important to consider their situation when deciding to file for bankruptcy.

Sometimes people will want to keep a bankruptcy secret from their cosigner. That isn’t usually an option, since the bankruptcy petition requires you to disclose all creditors and co-signers, including their name and mailing address. After filing, the bankruptcy court will mail a notice to everyone listed in the petition, including cosigners.

But since the bankruptcy will likely affect them and their finances, we usually recommend talking with them about it well in advance.

Options to Protect Your Cosigner

To include their debt obligations in bankruptcy, your cosigner would need to file separately on their own. But there may be a few other options to consider to make things easier on them.

1. Reaffirm the Debt

You can choose to reaffirm the debt, meaning you agree to continue making payments on it despite your bankruptcy. This keeps the cosigner from being held responsible, but it also means you’ll still be liable for the debt. In some situations, getting rid of all your other debts through bankruptcy can free you up to pay the cosigned debt.

2. Pay Off the Debt

If possible, you could pay off the debt before filing for bankruptcy, which would mean your cosigner isn’t affected.

3. Negotiate with the Lender

Sometimes, lenders are willing to negotiate new terms that might be more manageable for your cosigner. This could involve extending the payment period or reducing the interest rate. However, keep in mind these arrangements usually aren’t binding by law. Make sure to get any agreements in writing.

If you need a Chapter 7 but worry about your cosigner, we offer a free consultation where we can discuss all your options.

darrell-castleLegal Help for Chapter 7 and Cosigned Debt

Filing for Chapter 7 bankruptcy is a big decision. And if you have cosigned debts, it’s important to understand how it can affect you and your cosigner. So if you’re considering Chapter 7 bankruptcy and have cosigned debts, don’t make the decision alone.

Our trusted Memphis bankruptcy team can provide you with the guidance you need. We offer a free consultation, where we can explore all your options and help you get back on your feet. And if needed, we can also help you consider how to discuss it with your cosigner.

Your financial future is important, and so are the people who have supported you along the way. Let’s work together to find the best way forward.

To get started with a free conversation, no strings attached, just give us a call today at 901-327-2100 or contact us online.