Crucial Facts About Co-Signed Debts in Bankruptcy

Bankruptcy protects you from your co-signed creditor and also from your co-signer. Be sure to cover any legal obligation to your co-signer.

Protecting Only Yourself

Assume that you and your co-signer are both legally liable on a debt to a creditor. And you can’t afford to pay the debt.

Let’s focus today on protecting yourself. If you can’t pay the debt, you have to consider two separate obligations—to the creditor itself, and to the other signer.

Your Obligation to the Creditor

The obligation to the creditor is based on your promise to pay the debt. This obligation can most likely be discharged (legally written off) in a bankruptcy case. The creditor could object to the discharge based on your alleged fraud or misrepresentation, or sometimes on other exceptions. But those objections or exceptions don’t apply to most debts.

Your Probable Obligation to Your Co-Signor

Usually you have a distinct legal obligation to the other person legally liable on the debt. What exactly that obligation is depends on the circumstances.

Assume the other person co-signed to enable you to get credit. Then there could be a stated understanding that, if the co-signer ever had to pay the debt, you’d have to pay back the co-signer. You may have effectively promised to pay back the co-signer if necessary. That obligation to repay may not be stated but just presumed by both people.

Or it’s possible that the stated or presumed understanding was that you wouldn’t have to re-pay your co-signer. The co-signer could have said “I’ll co-sign and if you can’t pay the debt I’ll take care of it without you having to pay me back.” Maybe not likely but it’s possible.

But now assume instead you co-signed to help the other person, and you got no benefit from the credit acquired. Then you may have no legal obligation to the other person.

So again you may or may not have a legal obligation to the co-signer.

Being Practical

There’s a good chance the creditor is going to pursue whoever is legally liable to it. That would usually be both you and the other signer. So you need to protect yourself both from the creditor itself and from any potential liability to the co-signer. A bankruptcy would likely discharge both obligations, protecting you from both.

So when you file bankruptcy, it’s critical to list both the creditor and your co-signer on your schedule of creditors. Otherwise you could remain liable to your co-signer after your bankruptcy case is finished.

Can Your Co-Signer Object?

Just like the creditor, your co-signer could try to object to the discharge of your obligation to him or her. But such an objection would have to be based on your fraud, misrepresentation, or similar bad behavior in the incurring of the debt. As stated above, these objections are rare. The co-signer would have to show that you somehow fooled him or her into being the co-signer. For example, if you had assured her that your credit was good when it wasn’t, or that your income was much more than it really was, those could be valid grounds for objecting to the discharge of your obligation to the co-signer.

Although relatively rare, these objections tend to be raised out of anger by people with personal connections to you. Former friends, ex-spouses, ex-business partners may react out of spite and anger because they have a personal axe to grind. Plus they may have compromising information (or think they do) providing grounds for objection more than conventional creditors would.

If you suspect that a co-signer may react this way, explain the situation thoroughly to your bankruptcy lawyer. He or she can access the situation, give you appropriate advice, and take any appropriate action to minimize your risks.