I’m a codebtor on a debt. How does bankruptcy affect my codebtor? I often see codebts for vehicles and mortgages. If you are someone who is considering filing for bankruptcy and you have a vehicle that you’re going to pay for through that bankruptcy, then your codebtor will be protected provided you continue to make your payments.
However, if you wind up surrendering the vehicle or if the vehicle is already repossessed prior to your Chapter 7 bankruptcy filing, then the debt is only going to be eliminated as to you. The creditor has the ability to go after the non-filing cosigner for any deficiency or any amounts still owed on the vehicle. That codebtor may be surprised to learn for the first time that you no longer have the vehicle and that you are no longer obligated for the vehicle. Therefore, be very careful on who you cosign for, if at all.
In the Chapter 13 scenario, you as a cosigner can protect the codebtor by paying back 100 percent of the debt through the Chapter 13. Chapter 13 bankruptcy allows for a special class when the debt is cosigned. In many cases, you can eliminate credit card bills, medical bills, personal loans, and pay those debts less than in full – sometimes as low as 10 cents on the dollar – and still pay for a vehicle or other cosigned debt at 100 percent to protect the cosigner.
If you have cosigned debt, you have to make a decision on how you want to treat that creditor. You might have a situation where you’re no longer keeping the vehicle but you want to make sure that any unsecured deficiency is paid 100 percent to protect the codebtor. Your Chapter 13 attorney will be able to advise a plan and file the proper Chapter 13 documents to provide for protecting that codebtor. That is my recommendation when dealing with any cosigned debt, that you do your best effort to protect the codebtor unless of course the relationship has fallen off to the point where you have no interest in protecting the codebtor. Each case is different, but I definitely broach the topic with my client prior to filing any kind of Chapter 13 plan that involves joint debt.