Co-signers and Bankruptcy

Bankruptcy provides a fresh start for many, but what happens when some of your secured debt, such as a vehicle, has a co-signer? If you are planning on filing for Chapter 7 bankruptcy, and in doing so surrendering secured property, you should understand that the protection of bankruptcy only covers the person filing, not the co-signing party.

Lets say that your sweet Granny Ann helped you to get a new car by co-signing on the loan with you. After a few years you realize that your auto loan payments are just too high and you are drowning in debt. When you decide to file for Chapter 7, even though you have surrendered the vehicle, sweet Granny Ann is still legally responsible for the remaining balance. However, if sweet Granny Ann also decides to file for Chapter 7 bankruptcy, she could then discharge her own legal responsibility for the remaining balance.

This is the reason that most married couples are urged to file a joint petition. However, if a married couple does not have any joint debt then it may not be necessary to file bankruptcy together. In Minnesota, you are not automatically liable for all of your spouse's debts, but you are responsible for your spouse's debts incurred during the marriage for necessities of life, including medical bills.

In a scenario where the person filing for bankruptcy is the co-signer on a debt, lets say it’s sweet Granny Ann and she co-signed with you on your car, she must still list the vehicle and debt in her bankruptcy. She would be able to explain on her schedule that the vehicle actually belongs to her grandchild and that her grandchild makes all of the payments. This typically does not affect the contract between the grandchild and the lender, this would just eliminate Granny Ann’s duty as a co-signer.

There are many complex circumstances and legal issues that can effect co-signers when filing for bankruptcy. Contact Minnesota bankruptcy Attorney Gregory J. Wald today if you have questions about this matter or would like to set up a consultation.

The Difference Between Secured and Unsecured Debt

The type of debt you have plays an important role in what happens if you default on a loan.

Secured Debt is any debt that is backed by some sort of physical property, such as a car loan or a mortgage. The car loan is secured by the car itself and the mortgage is secured by the home.

In the event you fall behind on your payments on a secured debt, your creditor has the right to take back the property (repossess), sell it and apply the proceeds to the debt that you owe. Additionally, you may still have a balance owed even after the sale of the item is applied to the debt.

Dealing with your secured debt in bankruptcy can be done one of two ways. The first way is by filing for Chapter 7 bankruptcy and returning the item so that you no longer have to make payments on it. The other option is to restructure your payments by filing for Chapter 13 bankruptcy and keeping the item. Either way, with any secured debt the creditor gets something in return.

Unsecured Debt is typically a debt you incur to obtain goods and services. It can be medical debt, a student loan, a credit card or a personal loan. Essentially, there is no collateral tied to the debt. With this type of debt the creditor won't be able to repossess the item you purchased but they are able to take legal action or garnish your wages to recover a balance owed.

Filing for bankruptcy can ease the burden of both secured and unsecured debt. Filing for bankruptcy may even help you keep your car, stop wage garnishments, and remove some or all of your debt. Contact Minnesota Bankruptcy Attorney Gregory Wald for more detailed information specific to your situation.