How Your New York Bankruptcy Affects Co-Debtors

Filing for bankruptcy will affect your co-debtors in different ways depends upon whether you've filed a Chapter 7 or Chapter 13 bankruptcy. We asked a New York attorney who's been helping people file for bankruptcy for many years to explain how joint credit obligations such as car loans, mortgages and credit card bills affect both parties in a bankruptcy.

New York Attorney Elliot Schlissel

Elliot Schlissel, a New York bankruptcy attorney, told us that understanding how your filing for bankruptcy affects your co-debtors depends upon whether you've filed a Chapter 7 or Chapter 13 bankruptcy. He explained both types:

• New York Chapter 7: If it’s a Chapter 7 bankruptcy, which is very often called a “straight bankruptcy,” the purpose of that is to eliminate your debts completely. In a Chapter 7 bankruptcy, all of your assets are basically liquidated, except for exempt assets, and distributed to your creditors. Now, if you don’t have any assets, such as a house, Chapter 7 is usually the way to go and at the end of the bankruptcy you have no debts at all.

  The problem is that if you file a Chapter 7 bankruptcy in New York and you have a co-debtor, only you are discharged from the debt. At the end of the bankruptcy, the co-debtor still owes the debt. Whatever portion you didn’t pay, or if you didn’t pay any portion of it, the co-debtor or guarantor owes the balance of the debt. In those situations where there’s husbands and wives or co-debtors, it is very often recommended that they both file for bankruptcy.

• New York Chapter 13: In a Chapter 13 bankruptcy, you’re entering into a “plan” where you pay a percentage of the amount owed. If it’s a secured creditor which has a lien on your car, or a financial institution that holds a mortgage on your house, very often you’re paying 100 percent of what is owed to them. If the debt is owed to credit card companies, sometimes the plan calls for payments as low as 10 or 15 percent of what you owe.

In a Chapter 13, there is a stay, or injunction, preventing the creditor from taking legal action against the co-debtor or guarantor. But that doesn’t release the co-debtor from liability. The creditor can go after the co-debtor for the amount of the debt that is not paid under the Chapter 13 plan.

Bankruptcy statutes are complicated – especially after amendments  were passed in the Bush Administration. Schlissel says that this area of law can be much more complicated than a lot of other areas of law that consumers have to deal with and that not all attorneys do bankruptcy. In fact, he says that most attorneys do not do bankruptcy because they don't want to get involved in dealing with federal proceedings.