Having a co-signer is a good way to get more credit. However, there is a dark side – especially when it comes to filing bankruptcy. There are several ways to address these types of debts, but careful planning is required before embarking on a bankruptcy.
Becoming a co-signer is easy and at one time often meant that the borrower(s) received better loan terms - after all, the bank received another target to go after if the loan was not paid. Nowadays, a co-borrower often does little to enhance the ability to obtain credit and in fact can hinder the process.
Co-signed obligations receive special treatment in bankruptcies. For instance, there are several unique disclosure requirements that must be satisfied. From the standpoint of the law, your co-obligor has a right to know that you filed bankruptcy. Why? Because s/he is now a creditor of yours.
Seem strange? The reason your family member or friend is now your creditor is due to the fact that s/he is still obligated on a loan for which you were equally liable. So, to the extent the co-signer pays more than “her share” she would have a claim against your bankruptcy estate. Put differently, while your bankruptcy may result in a discharge for you, the co-signer’s obligation will survive and s/he would still be liable for the obligation.
There is good news. In the context of a Chapter 13 bankruptcy, a recent appellate court decision held that a debtor may be permitted to pay the full amount of co-signed obligation through the Chapter 13 plan, while not paying the full amount of other unsecured obligations. This is a rare exception to the rule that a debtor may not discriminate as between unsecured creditors. Moreover, a Chapter 13 provides a special co-debtor stay — similar to the automatic stay — which protects your co-signer like you from collection efforts while the plan is going forward.
Another critical issue is how that co-signed debt was being paid prior to bankruptcy. If the court considers your co-signer an “insider” then a bankruptcy trustee might be empowered to get the money paid on that obligation back on the theory that the creditor received preferential treatment. That’s correct - the trustee could take back payments made to the bank within 90-days prior to the bankruptcy filing. The trustee could also go after you co-signer for a year’s worth of payments — because you “preferred” your co-obligor by paying this obligation rather than paying other creditors.
There are important pre-bankruptcy steps we will generally take to help ensure that the client’s former payment on a co-signed debt does not raise the interest of the trustee. As well, we will explore various scenarios of discharging a co-signed obligation and how those options may impact the other responsible obligors. Working intelligently, we find the best solutions for our clients.
Bankruptcy laws are very powerful, but these laws can also be complicated – especially for the unwary. Hiring skilled counsel is the first step to securing the life changing benefits that a well-managed bankruptcy offers.
Call us today for a free confidential consultation with Attorney David Speckman.
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