Bankruptcy And Its effect On Co-Signer Obligations
Filing a bankruptcy case will NOT eliminate the liability of any co-debtors or co-signers on loans or other debts owed by the party filing bankruptcy. The only exception to this, however, is if the debtor filing bankruptcy is doing a 100% repayment plan in a Chapter 13 or Chapter 11 case.
A common misconception that people have about bankruptcy is that bankruptcy discharges the party filing bankruptcy from the legal obligation of paying on a given debt. The reality is that bankruptcy does not not eliminate the debt itself. The debt still exists and the creditor cannot pursue recovery of that debt from a party discharged in bankruptcy. In fact, a primary purpose for having a co-signer on a loan or credit card application, is to allow the creditor to recover against the co-signer in the event that the primary obligor defaults on the debt (such as by filing bankruptcy). Therefore, it is clear that bankruptcy does in fact have an effect on a co-signer’s obligation… and that effect requires the co-signer to pay up and take the heat for the primary obligor.