If someone signed with you on a loan or debt and you are considering bankruptcy in Massachusetts, you may be concerned about what your filing could mean for them. Filing bankruptcy usually triggers an automatic stay, which stops most collection efforts against you, although exceptions and limits apply. However, Chapter 13 provides an additional co-debtor stay that generally blocks creditors from seeking payment from the person who co-signed for covered consumer debts while the stay applies. The type of bankruptcy you file can affect how creditors treat them.
How Chapter 7 affects a co-signer
Chapter 7 generally does not protect a co-signer from collection. If the court discharges the debt, you are no longer personally responsible for paying it, but your co-signer can still be liable for the unpaid balance.
For instance, if a family member signed with you on a personal loan, the creditor may seek payment from that person once your Chapter 7 case begins. Your discharge does not protect someone who did not file with you.
How Chapter 13 can protect a co-signer
Chapter 13 provides a co-debtor stay for consumer debts. Consumer debt means an obligation you incurred mainly for a personal, family or household purpose. The protection does not apply to debts incurred mainly for business purposes.
While the stay applies, a creditor generally cannot collect the covered debt from the person who signed with you. The protection may continue while you make payments through the repayment plan in your case. However, a creditor can ask the court for permission to seek payment from the co-debtor in some situations, including when the plan would leave part of the debt unpaid.
What to review before filing
It can help to identify each co-signed account and determine the remaining balance. You can also review whether the obligation is a consumer debt and how it would be handled in a Chapter 13 plan.
Understand how the debt affects each signer
The same debt can have different consequences for you and your co-signer during bankruptcy. Reviewing both sides of that obligation can prevent assumptions about who remains responsible and when collection may occur. An attorney can review the debt and your proposed bankruptcy filing to clarify how the rules apply to each person.