If you are considering a New York bankruptcy and have guarantors or co-signers on any or all of your debts, then you may wonder how filing may affect them. Once you are officially bankrupt, doesnâ€™t it mean that your creditors will now go after the people who guaranteed those debts? These are usually family members or close friends, and you worry that seeking protection for yourself will place them in financial jeopardy.
Theoretically, yes. But there are also ways that you can protect them from the financial consequences of your decision.
Co-signer vs. guarantor
Both co-signers and guarantors are responsible for repaying your debts if you can no longer do so. While they serve the same functionâ€”getting you the loan or asset if you lack the income or credit to qualify on your ownâ€”creditors treat them differently if you declare bankruptcy.Â While co-signers can be approached for payment at any time, creditors typically have to try collecting from you first before they chase the guarantor.
How bankruptcy affects co-signers and guarantors
The type of bankruptcy you file will have an impact on whether or not your co-signer or guarantor will have to cover the obligation.
When you file Chapter 7, an automatic stay protects you, but not the people who helped you acquire the debts. Creditors are free to pursue them unless you do one of the following:
- Reaffirm the debt: You can choose to reaffirm any secured debt prior to receiving your Chapter 7 discharge. This means that you voluntarily give up the benefit of being discharged from that obligation and become personally liable for it once more.
- Pay the debt off: Although you are no longer obligated to repay debts discharged in a Chapter 7 bankruptcy, you always have the option of voluntarily paying them off afterwards. Continuing to make payments can persuade your creditors to leave your guarantors and co-signers alone and work with you instead.
If you decide to deal with your debts via a Chapter 13 bankruptcy, then your guarantors and co-signers have a higher degree of protector. This is because you have to option of paying off these supported debts through a court-approved repayment plan.
The moment you file a Chapter 13, those who supported the debt are automatically protected under what is called the Chapter 13 co-debtor stay.Â However, your creditors can still ask the bankruptcy court to lift the stay if the following circumstances apply:
- Your debt will not be paid off in full through the Chapter 13 repayment plan
- The creditor will face severe hardship if the stay remains in place
- Your co-signer or guarantor was the one who actually benefited from the debt
The co-debtor stay also ends if your case is dismissed or converted into a Chapter 7 bankruptcy.
If you need advice on how to get relief from your debts while minimizing the risk to your co-signer or guarantor, then contact a New York bankruptcy attorney today. They will explain your options and help you make the best decision for your circumstances. Jayson Lutzky has over 33 years of experience practicing law in New York with an office in the Bronx. He handles personal bankruptcies and offers free in-person consultations. Call 718-329-9500 or visit www.MyNewYorkCityLawyer.com to set up your appointment and get a fresh financial start.