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How does filing bankruptcy affect a co-signer?
The Bankruptcy Code uses the term "codebtor" to describe an individual
who is also liable for a debt. A bankruptcy discharge doesn't eliminate
the liability of a codebtor. There is, however, a "codebtor stay" in
Chapter 13 cases that prevents creditors from pursuing rights against
codebtors until the case is closed, which may be three or even five
years after the petition is filed. There are exceptions to the codebtor
stay, however. If the codebtor is the one who actually got the
"consideration" for the debt (e.g., you cosigned a car loan for your
daughter, who actually owns the car), if your Chapter 13 plan proposes
not to pay the debt, or if the creditor's interests would be
irreparably harmed by continuation of the codebtor stay, the creditor
can seek relief from the court. And, if your debt arose in the ordinary
course of business (as when you cosign an ordinary course loan to a
corporation you control), there is no codebtor stay in the first place.
(Reviewed 11.14.08)
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