Many times I’ll get questions about how co-signed obligations are treated if you file bankruptcy. You might have had a co-signer, for example, on a mortgage, on a car, on a student loan, or something, or even on a credit card for that matter. Usually, what happens if you file the bankruptcy case then the creditor still has the absolute right to go ahead and pursue the person who co-signed for that car, that house, that student loan, or that credit card.
When you file the bankruptcy case, you have invoked the protection of what we call the automatic stay against your creditors. Basically, it’s just an injunction that goes up as a wall between you and your creditors as far as whether they can continue to try to sue or garnish you. However, that does not apply to somebody who has, in fact, co-signed an obligation for you. That creditor, in most instances, can still go ahead.
Just to protect themselves, they might file a special motion with the court for permission to pursue that co-obligor but nonetheless, you’re still going to be able to pursue that person. Another question we sometimes get is what happens if I just render my property to the creditor. That is I go ahead and I decide, “Well, I don’t want to keep this home anymore and I want to surrender it back to the creditor. I don’t want this vehicle anymore,” or furniture, it could be for that matter.
The creditor can go ahead and then sell the house or sell the car or sell the furniture, and if it’s sold for less than what the contractual obligation is, then, that creditor can still sue the co-obligor, the co-signer, for any deficiency so let’s take an example. Let’s say for example, that you had somebody sign a co-obligation. They were a co-signer on your mortgage payment and that you owed $150,000 at the time when you financed the house.
Let’s say, the house was foreclosed on and at the foreclosure, courthouse steps they only received $100,000 for that house. Well, because you filed the bankruptcy, you’re out of that obligation. However, there’s still $50,000 that is legally owned by the co-signer to the bank. The bank, in most instances, will try to pursue that co-signer. One of the other problems sometimes involving co-signed debts is that if you file a bankruptcy, that loan is going to show up on the co-signer’s credit application as being in bankruptcy. Usually, this is not a good thing for the co-signer. If you have questions about how filing a bankruptcy may affect a co-signer, please call my office at 770-792-1000.