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If you’re struggling with your debts and are considering filing for a North Carolina bankruptcy, you may want to pause and think about the implications if you have any cosigned debt. Cosigned debt is typically initiated when your credit rating is insufficient to qualify for a loan and someone else co-signs with you who has better credit. Once signed, both you and your cosigner are equally responsible for the debt. This also means that if you file bankruptcy, your cosigner will have a role in that situation as well.
Cosigners & Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, most of your unsecured debts will be discharged and you will no longer have to pay off the loans. However, your cosigner will still be on the hook for the original promissory note because the whole notion of cosigning is an obligation to pay the debt if the primary debtor is unable to do so. Chapter 7 is a perfect example of this instance and unless you fulfill the obligation, your cosigner’s credit will suffer and the creditor could pursue legal action against your cosigner.
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Protecting Your Cosigner in Chapter 7
There is only one way that you can protect your cosigner during a Chapter 7 bankruptcy. Federal bankruptcy laws allow you the option of choosing to pay some of your unsecured debts rather than discharging them. To protect your cosigner, you can choose not to discharge a particular debt, bring it current, if it isn't already, and maintain the payments. Depending on the type of loan – such as an auto loan – you may be able to reaffirm it.
Cosigners & Chapter 13 Bankruptcy
The best way to protect cosigners is to file Chapter 13 bankruptcy rather than Chapter 7. This type of bankruptcy puts you on a schedule to pay off your debt on a three to five year payment plan. Typically some unsecured debt will still be discharged or greatly minimized but you can choose to pay off 100% of the debt that was cosigned to protect your debtor in the long run. In the short run, your cosigner will also be protected by a “co-debtor stay.”
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Chapter 13 Co-Debtor Stay
When you execute a Chapter 13 bankruptcy, a co-debtor stay is initiated. This means that for a period of three to five years (the length of your repayment plan), so long as you are actively following your repayment plan, your creditors will not pursue your co-debtor for the debt payments. But there are conditions:
#1 The debt must be consumer debt rather than business.
#2 The cosigner must be an individual, not a corporation or a partnership.
#3 The cosigner did not become liable for the debt during the ordinary course of business.
#4 The cosigner must not have been the beneficiary of the debt.
If you file Chapter 13 and the repayment does not fully satisfy the debt, then the creditor must show proof that your inability to repay the debt in full causes them "irreparable harm." If the judge agrees, the co-debtor stay will be released and the cosigner will be pursued for the outstanding balance. If you have debt that was cosigned by someone else, you should carefully consider what type of bankruptcy you will file and how you will handle cosigned debt. To figure it out, you need the advice of a reputable and experienced North Carolina bankruptcy attorney. Contact John T Orcutt today to find out how to get the best possible debt relief solution when you have cosigned debt.