two people signing documents

If a friend, family member, or business partner asks you to co-sign on a loan, you’ll need to take the time to carefully consider the implications of this action. Though it may seem like a nice gesture, you may end up responsible for their debts. However, when the person you signed for tells you they’re filing for bankruptcy, you may not know what will happen to the co-signed debts. Keep reading to learn more and discover how a Shelby County, TN bankruptcy lawyer can help you navigate this complex process.

Why Are Co-Signers Necessary?

If you’ve been asked to co-sign on a loan, you may wonder why this is necessary. In many instances, if someone wants to take out a personal or business loan, such as an auto or SBA loan, they may not be able to if the lender is doubtful about their ability to repay the debt. This could be because the borrower has little to no credit history or a poor credit score. As such, they may ask the lender for a guarantor to hold liable for the payments if the borrower fails to comply with the terms.

What Happens to Co-Signed Debts When Someone Files for Bankruptcy?

When the borrower files for bankruptcy, they are not wiping away the debt. This is because bankruptcy only alleviates the debtor’s responsibility to pay for the debt. As such, a co-signer can be held liable for the remaining debt since the borrower no longer has an obligation to pay.

If the borrower files for Chapter 7 bankruptcy, a co-signer has no protections. This is due to the fact that there is an automatic stay placed on the filer, meaning collectors can no longer contact them about debt. However, this allows them to turn their attention to the co-signer, pursuing them about the debt.

However, filing for Chapter 13 offers more protection for co-signers and guarantors. This option places an automatic stay on these entities as well, meaning creditors cannot contact co-signers about the debt owed. Similarly, this option allows the borrower more time to pay off the debt, as they have a three- to five-year repayment plan set up. However, if they default on this plan, it is likely you will be held responsible for the debt.

How Can a Lawyer Help?

This process can be overwhelming and confusing for borrowers and co-signers alike. As such, it’s imperative to contact an experienced attorney if you’re considering filing for bankruptcy and have co-signed debt or you’ve signed on a loan and the borrower is considering bankruptcy.

When you need help, the Arnold Law Firm is ready to assist you. Our dedicated legal team has the experience you need to help you navigate the complexities of filing for bankruptcy. Contact us today to discuss the details of your case with a member of our firm.