NEW JERSEY BANKRUPTCY

AND CO-DEBTORS

–WHAT HAPPENS IF THE CO-

DEBTORS DOES NOT FILE

BANKRUPTCY?

TRAVIS J. RICHARDS SOUTH NEW JERSEY BANKRUPTCY ATTORNEY

Co-signing a loan for someone is risky. As a co-signer, you are legally liable for

that debt should the person default on the loan. In other words, if the person

fails to repay the loan, the lender will look to you for the full payment of the loan

balance. However, when we see a family member or close friend in need, it is

difficult to say no when we know that we can help.

Most people think of a co-signer as a spouse; however, you can co-sign a loan

for your parents, friends, other relatives, business partners. You can co-sign a

loan for anyone. The risk comes if the person fails to pay the loan or files

bankruptcy.

Bankruptcy and Co-debtors – How does it work?

When a person files bankruptcy, all debts must be included in that bankruptcy

filing including debts that have a co-signer. When the co-signer is the person’s

spouse and the spouse files bankruptcy, the issues of bankruptcy and co-debtors

becomes mute because the debt will likely be discharged against both co-signers.

However, if only one co-signer files bankruptcy, the issue of bankruptcy and co-

debtors then becomes

more of a problem for the

co-signer.

A co-signer is referred to

as a co-debtor in the

bankruptcy filing

regardless. The co-

debtor’s name and

address will be reported in the bankruptcy filing so the creditor and other parties

in interest will be on notice the debt has a co-signer. Furthermore, the co-signer

will receive notice of the person’s bankruptcy filing. This gives the co-signer the

opportunity to seek advice from a bankruptcy attorney as to the co-signer’s

rights, duties, and responsibilities with regard to the co-signed debt. The co-

signer needs to discuss the best course of action to protect his or her best

interests with an experienced bankruptcy attorney. Depending on the type of

debt and the chapter of bankruptcy filed, there may be several options available

for an individual facing the issue of bankruptcy and co-debtors.

Bankruptcy and Co-debtors in a Chapter 13 Bankruptcy

Chapter 13 can afford a co-signer a bit more protection than other bankruptcy

filings. Even though the co-signer may not have filed bankruptcy himself, the

protection for consumer debts that is given to the debtor is extended to the co-

signer of the debt. This only applies to consumer debts.

As long as the debtor remains in the bankruptcy case, the protection for the co-

signer will continue. If the debt is paid in full through the debtor’s bankruptcy

plan, the legally liability of the co-signer will be absolved when the case is

complete.

If the debt is not paid in full through the bankruptcy plan, the creditor may have

a legal right to pursue the co-signer for the balance; however, most creditors

choose to write-off any remaining debt. It is up to the individual creditor if it will

pursue the co-signer for the remaining balance.

When the co-signed debt involves collateral that is being surrendered through his

bankruptcy plan, the creditor can file a Motion to Modify the Co-debtor Stay to

allow the creditor to file a lawsuit outside of the bankruptcy against the co-

signer. This permits the creditor to pursue state court actions to repossess or

foreclose on the asset being surrendered by the bankruptcy debtor. If the co-

signer wishes to retain the collateral, he or she can arrange to continue paying

the debt under the original contract or allow the property to be returned to the

lender. If the property is sold for less than is owed, the creditor may pursue the

co-signer for the balance owed.

Before filing a bankruptcy case, you should discuss the issue of bankruptcy and

co-debtors with your attorney. Only an experienced bankruptcy attorney can

provide you with reliable advice as to whether the Co-debtor Stay will protect a

co-signer in bankruptcy. After the attorney gathers the relevant information

about the debt, he can make an informed opinion as to whether the co-signer

will be absolved of the debt with the debtor or if the debt will remain the legal

liability of the co-signer.

Bankruptcy and Co-debtors in a Chapter 7 Bankruptcy

Bankruptcy and co-debtors are treated much differently in a Chapter 7 case. A

non-filing co-signer will not be protected under the Chapter 7 bankruptcy case of

the other co-signer to the extent the co-signer is protected in a Chapter 13 case.

Debtors are protected by the automatic stay provisions of the Bankruptcy Code

as soon as they file their bankruptcy petition. The automatic stay prevents

creditors and others from filing a collection suit, pursuing collection actions or

otherwise contacting the debtor or taking other actions in an attempt to collect a

debt included in the

bankruptcy. If the debt is

subject to the bankruptcy

discharge, the debtor will no

longer be legally liable to repay

the debt once the case is

closed.

Unfortunately, the bankruptcy

discharge does not cover the

co-signer. The co-signer’s legal

liability to repay the debt in full remains after the debtor’s liability is released

through his Chapter 7 bankruptcy discharge. The creditor has the legal right to

pursue all state court or other legal actions to collect the full amount of the debt

from the co-signer. Of course, when dealing with Chapter 7 bankruptcy and co-

debtors, the debtor may voluntarily choose to continue paying the co-signed

debt after his case is closed in order to protect the co-signer from having to pay

the debt or face collections actions and harm to the co-signer’s credit rating.

Contact an Experienced Mount Holly Bankruptcy Attorney

Personal Approach, Professional Service, Affordable Payment Plans

The Law Office of Travis J. Richards, LLC is a full-service Mount Holly bankruptcy

law firm focused on Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, debt

consolidation, credit repair, tax liens, student loans and foreclosure. We

represent clients in Burlington County and throughout South Jersey.

Contact our office at 609-267-5297 to schedule your free consultation to

discuss bankruptcy and non-bankruptcy alternatives. You may also use our

convenient online contact form and one of our friendly, professional staff

members will contact you to answer your bankruptcy questions and/or schedule

a free consultation with Travis J. Richards.

About the Author

Travis J. Richards

Travis Richards is not your typical attorney. He understands the random curve balls life throws at honest, hard-working people. Growing up on farm in Southampton, New Jersey, money didn’t always come easy for many of his family, friends and neighbors. He saw that bad things often happen to good people. This background shaped his approach to the practice of law. Mr. Richards considers it a privilege to help clients from all walks of life recover from financial hardship. In doing so, he aims to provide every client with the same service he would provide a member of his own family. His mission is to get to know each client individually and provide the best legal advice possible for them to regain control of their lives.

“Over the past decade I have impacted the lives of hundreds of individuals and families in an extremely positive way,” he says. “Through bankruptcy I am able to show my clients a freedom that they thought impossible to achieve…My goal is not only wipe out the debt they have accumulated, but also help make sure they will never be in a situation to need my services again.” Mr Richards has helped hundreds of individuals eliminate debt, keep their property and return to financial stability. “Bankruptcy gives deserving individuals a second chance.”

Mr.Richards graduated with honors from Rutgers University, in New Brunswick, NJ where he majored in History. In 1999 he graduated, again with honors, from Rutgers School of Law, Camden, NJ. He was admitted to the New Jersey and Pennsylvania Bar in 1999, where he is licensed to practice law before the United States District Courts. Mr. Richards practices bankruptcy, mortgage loan modification work, debtor rights and credit card negotiations. He maintains memberships in the National Associate of Consumer Bankruptcy Attorneys, the Burlington County Bar Association, the New Jersey State Bar, the Pennsylvania State Bar, and the American Bankruptcy Institute

The Law Office of Travis J. Richards

141 High Street Mount Holly NJ 08060 Phone: 609 267-5297 Fax: 609 267-5295 Website: njbankruptcyinformation.com