The decision to file for bankruptcy protection can be a stressful one. The process is actually painless, but you don't know that from the get go. This leads to sleepless nights as you wonder what it will mean for your future. If you aren't careful, you might not take into account other people who will be affected as well. For instance, what about people who have co-signed onto some of your debt obligations?
You have two choices when filing personal bankruptcy. Chapter 7 filings allow you to liquidate all your debts. The downside, of course, is you also end up losing most of your assets as the court partitions out the proceeds from the sale of such assets to the creditors. You lose most everything, but at least get to move forward without all that debt hanging over your head.
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The second choice is chapter 13 in which you can reorganize your financial situation. In such filings, the goal is to keep as many assets as possible while greatly reducing your debt. The court ultimately wants to see a repayment plan that it feels you can meet, so that creditors can get something out of the debts owed.
So, what does this have to do with the impact of a bankruptcy filing on co-signers? The answer is simple. In a chapter 7 liquidation, your co-signer is exposed to all the debt that you escape on the obligation in question. If you try to eliminate a $25,000 loan for a car that your mother co-signed on, the creditor can still go after her. Obviously, that is a bad thing and stops many people from filing under this chapter of the bankruptcy code.
Chapter 11 works a bit differently. Remember, we are talking about a reorganization in this situation. This means things are more flexible and you can negotiate a particular deal with the creditor holding the note that you and the co-signer executed. This, obviously, leaves you in a better position with the co-signer and, in the case of mom, gets you invited back for the holidays!
Many people rush into bankruptcy filings without really thinking through all the effects doing so will have. Don't make this mistake. Sit down and talk to a bankruptcy attorney so you know what is on the line and the steps that can be taken to limit them.
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