Chapter 7 Bankruptcy

• Chapter 7 bankruptcy erases most of your debts, meaning that you are no longer obligated to repay the debts after discharge. However, unless the cosigner is included in the bankruptcy filing, he will have no protection from creditors under the discharge. Although the creditor cannot collect from you for the debt, it may pursue the cosigner for recovery of the discharged amount. If the cosigner does not pay your debt, the creditor my initiate collection activities such as calling and mailing the cosigner, reporting delinquencies to credit bureaus and filing a lawsuit against the cosigner. If the creditor files and wins a lawsuit, it may garnish the cosigner's wages and bank account balances in most states.
  
  

Reaffirmation

• When you file for Chapter 7 bankruptcy protection, you may sign a reaffirmation agreement to continue paying a particular debt. If the bankruptcy court determines that reaffirmation is in your best interest, it will exclude the debt from the bankruptcy discharge. Reaffirming a debt can keep the creditor from pursuing recovery against a cosigner as long as you continue making payments as agreed. If you fail to pay according to a reaffirmation agreement, the creditor can collect against both you and the cosigner.
  
  

Chapter 13 Bankruptcy

• In Chapter 13 bankruptcy, the court determines a monthly amount you must pay to your creditors for a period of time, usually between three and five years. Like Chapter 7 bankruptcy, this type of bankruptcy stops creditor calls and letters. Chapter 13 bankruptcy also prevents a creditor from pursuing recovery from the cosigner of a loan as long as you make your required bankruptcy payments. However, if you do not make your payments, the court will dismiss the case, and your creditor is free to collect against the cosigner.
  
  

Considerations

• Because a creditor can potentially collect against a cosigner in both Chapter 7 and Chapter 13 bankruptcy filing, you should carefully consider your ability to handle a loan before asking someone to cosign. Collection against a cosigner can cause her significant financial difficulties if she is unable to cover your loan. This can erode your personal relationship with the cosigner and will make it unlikely that she will ever cosign a loan for you again.