For most types of loans, a borrower can have another person “co-sign” the loan with them. When another person co-signs a loan, such as a student loan, car loan, or credit card account, they agree to become equally responsible for repaying the loan. Having a co-signer allows people to obtain loans who otherwise might not qualify for credit on their own. But when a person who has a co-signer files for bankruptcy in Michigan, what does the bankruptcy filing mean for the co-signer’s rights and obligations?

What It Means to Be a Co-Signer

A person who co-signs a loan agrees to repay the loan. This means a lender can pursue repayment for the entire balance of the loan from any co-signer. Adding a co-signer to a loan, especially someone with good credit, can make the loan seem less risky to lenders since the lender has more people responsible for repaying the loan. As a result, lenders may become more likely to approve loans or grant more favorable terms when applicants have co-signers.

At the same time, co-signers should understand the risks of agreeing to co-sign a loan, including the possibility of having to repay the loan if the primary borrower defaults. Because the co-signer may not receive account statements, they may not realize that the primary borrower has accumulated a significant loan balance until the lender pursues repayment.

Chapter 7 vs. Chapter 13 Bankruptcy and the Co-Signer’s Liability

What happens to a co-signer’s liability for a loan when a primary borrower files for bankruptcy? The consequences may depend on the type of bankruptcy that the primary borrower pursues. In Chapter 7 bankruptcy, the bankruptcy court will discharge the primary borrower’s obligation to repay the loan. However, the co-signer remains liable for the debt. Creditors can also pursue repayment from the co-signer despite the bankruptcy stay.

Conversely, a Chapter 13 bankruptcy may include a “co-debtor” stay that prevents creditors from pursuing repayment from a co-signer during the primary borrower’s Chapter 13 case. In a Chapter 13 bankruptcy, the primary borrower may establish a repayment plan to pay back the debt they took out with a co-signer. As a result, the borrower’s completion of their repayment plan may release the co-signer from further liability for the loan. However, when a borrower violates their repayment plan or obtains a discharge of any remaining balance on a co-signed loan, the co-signer may remain liable for that balance.

Michigan-Specific Consideration

Michigan courts will follow federal bankruptcy law and the legal effects that a Chapter 7 or 13 bankruptcy may have on a debt or a primary borrower’s obligations. However, state law will govern a co-signer’s contractual rights and responsibilities. Many loan contracts will contain acceleration clauses that allow the lender to pursue the full balance of a debt after any primary or co-signer files for bankruptcy. For this reason, co-signers in Michigan should seek local counsel for guidance about what a bankruptcy may mean for their liability for a debt they co-signed.

What Co-Signers Can Do to Protect Themselves

Co-signers can protect their financial interests through best practices such as:

  • Monitoring payment on the loan and their credit scores/reports
  • Regularly communicating with the primary borrower to identify signs of a potential bankruptcy
  • Considering paying off or refinancing the loan, if financially feasible
  • Negotiating with the creditor to prevent collection proceedings
  • Seeking legal advice to understand options before taking action after a primary borrower files for bankruptcy

Contact a Bankruptcy Attorney Today

If you co-signed a loan and the other person you signed with has filed for bankruptcy, a Michigan bankruptcy lawyer can help you protect your rights and interests. Contact Marrs & Terry, PLLC, for a confidential consultation with a bankruptcy attorney. Let’s discuss what a borrower’s bankruptcy filing may mean for you as a co-signer.