What happens to your co-signers when you file bankruptcy?
Chapter 7 and Co-debtors
In a Chapter 7 case, your co-debtor is not protected at all. Creditors and collection agencies can continue to call, mail and otherwise dun a co-debtor not protected by the bankruptcy stay.
Chapter 13 and Co-debtors
In a Chapter 13, your co-debtor may be protected by something called the co-debtor stay. Under Section 1301 of the Bankruptcy Code, your bankruptcy filing will create a stay for the benefit of a co-debtor as to collection of consumer debt. For example, if you and your brother are co-signers on a personal credit card debt, your filing will create a stay that protects your brother as long as you remain in Chapter 13.
Creditors can petition the bankruptcy judge for relief from the co-debtor stay, and the co-debtor stay will come to an end once your Chapter 13 case is over.
We have been able to use the co-debtor stay as leverage to negotiate debt settlements on behalf of co-debtors. Remember that credit card companies and other lenders are more interested in cash now than a promise to pay later.
Effect of Bankruptcy on an Authorized User
An authorized user is a person who has not personally signed a loan application (like a credit card application) but who has access to your credit line. For example, many parents obtain a credit card on their account for use by a college aged child. In such an instance, the authorized user clearly is not obligated for the cardholder’s full balance. However, a number of credit card lenders take the position that the authorized user may be responsible for charges incurred by that user during that time that the authorized user knew or should have known that the primary borrower was insolvent or preparing to file bankruptcy.
Further, federal law does allow a credit issuer like a credit card lender to post derogatory credit information on the authorized user’s credit reports.
Here, too, it is possible to negotiate a resolution. The authorized user may agree to pay an agreed upon amount representing charges incurred by that user for a recent period of time, in exchange for written assurances from the creditor that no negative credit reporting will take place.
Finally, you should not take the creditor’s word regarding whether your relative/friend is a co-debtor or authorized user. We have seen several instances where creditors insisted that a third party was a co-signer, but there was no evidence of that fact produced. If a creditor is attempting to collect a debt and you have concerns about the legitimacy of that debt, you can and should assert your rights to obtain proof of obligation from the creditor.