For individuals and families facing financial stress, bankruptcy can provide needed relief. However, if you have co-signers on a loan, lease, or joint account, you should understand how bankruptcy may affect them.

Key Takeaways

• A co-signer accepts full responsibility for repaying a debt if the primary borrower fails to pay.
• While bankruptcy provides legal protection for the primary borrower, those protections do not necessarily extend to co-signers.
• Whether the primary borrower files for bankruptcy under Chapter 7 or Chapter 13 will affect the co-signer’s rights and repayment obligations.
• Wisconsin law provides additional protections for co-signers when the primary borrower files for bankruptcy.
• Co-signers have various options to protect their finances and credit score when the primary borrower is considering filing for bankruptcy.

What Is a Co-signer?

A co-signer is someone who signs a legal contract, such as a loan or lease, and agrees to take full responsibility for repaying the debt if the primary borrower fails to pay. The co-signer does not receive money or property under the agreement. They simply provide financial security for the lender or lessor.

Under Wisconsin law, co-signers are “jointly and severally liable” for co-signed debts and can be totally liable for the debt if the primary borrower defaults. Creditors can seek repayment from the primary borrower or the co-signer for the full amount.

How Are Co-Signers Affected by Bankruptcy?

While bankruptcy provides debt relief for the primary borrower, those protections do not necessarily extend to co-signers or relieve them from their payment obligations. If a borrower has a co-signer and files for bankruptcy, the co-signer may still be responsible for the debt unless they file for bankruptcy themselves.

When the primary borrower files for bankruptcy, the debt is not automatically discharged for the co-signer. The primary borrower may receive a fresh start, but the co-signer may still have to deal with the loan, and a creditor could pursue them for repayment.

Key Differences Between Chapter 7 and Chapter 13

The type of bankruptcy the primary borrower files can affect the co-signer’s rights and responsibilities.

• A Chapter 7 bankruptcy does not alter the co-signer’s responsibilities. Creditors can seek wage garnishment and other authorized collection measures to seek full repayment from the co-signer, even when the primary borrower has filed for bankruptcy.
• Chapter 13 bankruptcy offers a co-debtor stay that prevents creditors from seeking to collect from co-signers if the loan is under repayment and the primary borrower pays on time.

Wisconsin-Specific Protections

Wisconsin law provides additional protections for co-signers in bankruptcy. Before attempting to collect on a debt, creditors must provide the co-signer with strict written notice informing them of the primary borrower’s default, and must allow time for repayment before taking action. Wisconsin law also protects a co-signer’s credit after a primary borrower files for bankruptcy. If the co-signer continues making payments on time, they can avoid negative credit reporting, even if the primary borrower filed for bankruptcy.

How Bankruptcy Affects Joint Accounts

When the primary borrower files for bankruptcy, the effect on the co-signer can vary depending on the nature of the account. The co-signer remains liable for the full amount of joint credit cards and loans. Joint bank accounts generally remain open, but the bankruptcy could affect access to funds.

Protecting a Co-signer When Filing for Bankruptcy

Co-signers should understand the potential risk before accepting liability for someone else’s debts. If the primary borrower is considering filing for bankruptcy, they should discuss it with the co-signer before filing. Options that can protect the co-signer’s finances and credit score include:

• Signing a release that removes the co-signer from the loan so they are no longer responsible for the debt. This may require a new loan or a loan restructuring.
• Re-affirming the debt excludes it from bankruptcy. The debtor remains responsible for repayment, but the co-signer’s finances and credit score are protected.
• Consolidate loans in the name of the individual filing for bankruptcy.
• Creditors may be willing to negotiate loan terms, allowing for lower payments or a temporary pause on repayment.

Contact the Bankruptcy Attorneys at the Muter Law Office Today

Bankruptcy laws are complex, and filing for bankruptcy on a debt that has a co-signer presents various legal challenges. The Wisconsin bankruptcy attorneys at the Muter Law Office can review your situation and offer advice and guidance to help you move forward.

The Muter Law Office is located in Baraboo and represents clients in bankruptcy matters throughout Wisconsin. Contact the Muter Law Office today to schedule a free and confidential appointment to discuss your situation and how we can assist you.