Under contract law, a “signer” and a “co-signer” are both obligated to pay a debt, and a creditor can legally collect the whole amount of the debt from either one. It doesn’t matter which name is first on the contract. If one or the other files bankruptcy, that might change.
If a person (whether he’s a “signer” or a “co-signer”) files Chapter 7 bankruptcy, that person’s obligation to pay the debt is wiped out (unless, of course, that person “reaffirms” or re-obligates himself to pay the debt). Regardless of the what the debtor chooses to do in his Chapter 7, the non-filing party will remain obligated to pay the debt, and the creditor can still collect from him.
Suppose a parent and a child are “co-signers” on the child’s car note. The child is not paying the debt, surrenders the car, and then files chapter 7 (or files chapter 7, and then surrenders the car). In that case, the child’s obligation to pay the debt is wiped out, but the car lender can still collect any deficiency owed from the parent who signed the note, but who did not file bankruptcy.
Suppose instead that the child has financial problems with medical bills, law suits, credit cards, or any debt other than with the co-signed car note. The child files chapter 7 to wipe out the debt that he can’t pay, but he wants to keep and continue to pay for his car. The car lender is agreeable to this, because the car payments are basically up to date. Thus, the child “reaffirms” the car note in his chapter 7. He continues to drive the car, and make payments on it.
In this case, what is the effect on the non-filing parent? Basically nothing. The child would keep the car, and both the parent and the child would continue to be obligated on the note, as they have been from the beginning. The car lender will not report that the parent filed bankruptcy to the credit bureau, because that would be untrue. The payments aren’t late, because the child is paying. The parent continues to be at risk in the event of a future default, because that’s what being a “co-signer” means.
Suppose instead that the parent is the one who drives the car and pays for it. The child, who is a co-signer on the note, has financial problems, and files chapter 7. The child doesn’t want to continue to be obligated to pay for the car that the parent owns, drives, and pays for. What is the effect of the child’s filing bankruptcy on the parent?
In this case, the child’s obligation to pay is wiped out, because he is the debtor, and has not chosen to reaffirm the debt. The parent still owes the debt. However, the note is not in default, because the parent is current with the payments. In this case, the parent continues to own the car and drive the car… and continues to make payments on it. Informally, you could say that the child’s name has been “taken off” the note, and that there has been no adverse effect on the parent.
It is important for the person filing bankruptcy to let the lawyer know if any debts are co-signed. You can’t just ignore it and “leave it out”. What you do instead is list it, and then indicate in your paperwork what you want to happen with that particular debt. Call us at 678-519-4143 to discuss your particular situation, and we’ll try our best to help you.