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 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 (whether he’s the “signer” or the “co-signer”… it doesn’t matter) will remain obligated to pay the debt, and the creditor can 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. 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 paying the co-signed car note. He 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.
What is the effect on the non-filing parent of the child filing chapter 7 and reaffirming the car note? 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 to the credit bureau that the parent filed bankruptcy, because that would be untrue. The payments aren’t late, because the child is paying. The parent continues to be obligated to pay the debt in the future if there is a default, because that has always been his obligation ever since he chose to “co-sign” the note.
Suppose 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, but 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 indicate in your paperwork what you want to happen with that particular debt. Call us at 770-683-3303 to discuss your particular situation, and we’ll try our best to help you.