Co-signer Responsibility

• If you do not meet a lender's qualifications for a loan or line of credit, the lender may request that you ask another individual to co-sign the application with you. If approved, the account belongs to you and you alone, but the lender can demand payment from the co-signer in the event you default on the agreement.
  
  

Chapter 13 Bankruptcy

• When you file a Chapter 13 bankruptcy case, the court restructures your monthly payments to your creditors to ensure that the payments fit into your budget. You then make payments directly to the bankruptcy trustee who allocates those payments to your creditors. Because you are making payments on your debt during a Chapter 13 bankruptcy, the co-signer is under no obligation to pay off your creditor. If you stop making payments to the trustee and the court dismisses your bankruptcy case, both you and your co-signer lose the court's protection and your lender may pursue either of you for the debt. In addition, if you cannot pay the debt in full within five years, the court will still discharge the debt but your creditor can hold your co-signer responsible for paying the remaining amount.
  
  

Chapter 7 Bankruptcy

• A Chapter 7 bankruptcy eliminates your liability for unpaid debts. The court requires that you direct any assets you own that are not exempt from the bankruptcy toward paying down your debts. The court discharges any debt that remains. However, this often leaves creditors not receiving any payment for your debts. Rather than write off those debts as a loss, the creditor has the option to pursue your co-signer. Even though you are no longer legally responsible for payment, a Chapter 7 discharge does not protect your co-signers from your creditors.
  
  

Reaffirmed Debt

• You have the option to reaffirm debts when you file for bankruptcy. By reaffirming a debt, you exclude it from the bankruptcy case and agree to continue making payments on the account. If you reaffirm an account that has a co-signer and that the court would otherwise discharge through Chapter 7 bankruptcy, you prevent your creditor from forcing your co-signer to pay off a debt you are not longer legally responsible for.
  
  

Considerations

• If you're considering filing for Chapter 7 bankruptcy rather than Chapter 13, telling your co-signer about your decision as soon as possible gives him the opportunity to make payment arrangements with your creditor before the court discharges the debt. The account appears on your co-signer's credit report as well as your own, and missed payments will damage both of your credit scores.