Co-signers can help, hinder bankruptcy

Having a co-signer is a good way to get more credit. It’s a unique issue when you are filing bankruptcy, though. There are a lot of ways to address these debts but you have to be cautious.

A co-signer is often helpful in getting more credit or better terms on loans. After all, the bank has another person to go after if you don’t pay. When that happens, obviously you feel more strongly about protecting your friend or family member who co-signed for you.

There are particular issues that can come up in this situation though. First, it is very important that your attorney knows a debt is co-signed, this has to be disclosed in a particular fashion. Also your co-signer has a right to know you filed bankruptcy.

But there are other issues. Your bankruptcy discharge will not typically wipe out the requirement of your co-signer. So they are still obligated to pay the account if you don’t. Of course, sometimes you can use bankruptcy to get rid of the other debt so you can focus on repaying the co-signed debt, even if you wiped out your legal obligation.

In other situations, a Chapter 13 bankruptcy could allow you to pay the co-signed bill in full while paying little or nothing to other unsecured creditors.

Another issue is how that debt was being paid prior to bankruptcy. If the court considers your co-signer an “insider” then a bankruptcy trustee might be inclined to get money from them — as a preference (a preferred treatment over other creditors). But, you say, I did not pay them a penny, I just paid the loan to the bank! That’s correct. And the trustee could go take back payments to the bank made during the 90-days prior to filing.

You see, part of bankruptcy is recuperating any unwarranted benefit received by creditors who have special influence over you — influence that might (intentionally or not) result in you not paying everyone else as well and, ultimately, causing everyone a loss.

The important thing here is to be sure your lawyer knows about the co-signer on any of your debt and knows if you have been paying that bill, and how much, in the last year. And be prepared to work with him and your co-signer to get everyone through the process.