One of the differences between a Chapter 13 bankruptcy and a Chapter 7 bankruptcy is how a co-signor is treated. After a Chapter 7 bankruptcy, there are very limited options to protect a co-signor on a debt. For more information about co-signors in Chapter 7 bankruptcy, see the article I wrote on this. In a Chapter 13 bankruptcy, a creditor is not able to take collection action against a co-signor without permission from the bankruptcy court. When you file bankruptcy, there is a stay placed on all collection actions by creditors for the length of the bankruptcy. In a Chapter 7 bankruptcy, this stay does not affect collection actions against a co-signor. However, in a Chapter 13 bankruptcy, the stay does extend to collection actions against a co-signor.
Another difference between a Chapter 13 and a Chapter 7 with respect to co-signors is that you can treat co-signed debts differently than other debts in your Chapter 13 plan. If the repayment of the co-signed debt will take longer than the length of your bankruptcy payment plan, you can continue to make payments on the co-signed loan directly to the creditor. You can also structure your bankruptcy plan to pay the co-signed debts in full through the bankruptcy payment plan.
Both of these approaches have some shortcomings though. If your plan has you paying the debt directly, your obligations on that debt will not be included in your discharge. This means that this creditor can legally collect from you for any remaining balance after you complete your Chapter 13. If you are paying the debt through bankruptcy, the creditor will not receive interest on the debt. After you are discharged, the creditor will be able to collect the unpaid interest from the co-signor.
If you are struggling due to co-signed debts, contact us or call us today at 757-276-6555. My staff will schedule a free consultation with me so I can advise you on the best way to handle your co-signed debt.