AMA #2: If I am a co-signer on a credit card, and I file for bankruptcy, how does that affect the other co-signer on the account?

Navigating Chapter 7 Bankruptcy in Washington state: How Does It Affect Co-Signers on Credit Cards?

Bankruptcy can be a difficult decision, often marked by stress and uncertainty. It's a financial step that can have far-reaching implications, not just for the individual declaring bankruptcy, but potentially for others connected to their financial obligations. One common concern among those considering bankruptcy is how it might affect co-signers, particularly on credit card accounts. If you're a co-signer on a credit card and the primary account holder files for bankruptcy, what happens to you? Let's explore.

Understanding Co-Signer Responsibility

First, it's crucial to understand the dynamics of being a co-signer on a credit card. When you co-sign for a credit card, you're essentially agreeing to share responsibility for the debt incurred on that card. This means that if the primary account holder (the person who initially applied for the card) fails to make payments, the co-signer is equally liable for the outstanding balance.

Types of Bankruptcy and Their Impact

Bankruptcy laws vary depending on the jurisdiction, but generally, there are two common types of bankruptcy individuals may file for: Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy: Also known as liquidation bankruptcy, Chapter 7 involves the sale of the debtor's nonexempt property to repay creditors. Any remaining eligible debts are typically discharged, providing the debtor with a fresh financial start. In the context of co-signed credit cards, if the primary account holder files for Chapter 7 bankruptcy, the co-signer may still be held responsible for the debt unless they also file for bankruptcy or manage to negotiate other arrangements with the creditor.

Chapter 13 Bankruptcy: Unlike Chapter 7, Chapter 13 bankruptcy involves a repayment plan where the debtor agrees to pay off debts over a period of three to five years. Co-signers on credit cards may have some protection under Chapter 13, as the repayment plan can include the credit card debt. However, if the primary account holder fails to make the agreed-upon payments, the co-signer could still be pursued by creditors.

Protection for Co-Signers

While bankruptcy can present challenges for co-signers, there are certain protections in place, depending on the circumstances and the type of bankruptcy filed.

Automatic Stay: When an individual files for bankruptcy, an automatic stay goes into effect. This legal injunction halts most collection actions by creditors, providing relief to debtors. This means that creditors cannot pursue the co-signer for repayment during the bankruptcy proceedings.

Co-Debtor Stay: In some situations, Chapter 13 bankruptcy may offer additional protection for co-signers through what is known as the co-debtor stay. This provision prevents creditors from pursuing co-signers for consumer debts while the primary account holder completes the repayment plan under Chapter 13. However, it's important to note that this protection does not apply to all debts or all co-signers, so consulting with a knowledgeable bankruptcy attorney is crucial to understanding your specific situation.

Potential Risks for Co-Signers

Despite these protections, co-signers should be aware of potential risks associated with the primary account holder's bankruptcy.

Credit Score Impact: A bankruptcy filing, whether Chapter 7 or Chapter 13, can have a significant negative impact on the credit scores of both the primary account holder and the co-signer. Even if the co-signer is not directly responsible for repaying the debt during the bankruptcy proceedings, the account status may still appear on their credit report, potentially lowering their credit score.

Future Credit Applications: Co-signing for a credit card implies shared responsibility for the debt. Therefore, even if the primary account holder's bankruptcy discharges their obligation to repay the debt, the co-signer's creditworthiness may still be affected. Future creditors may view the co-signer as a higher risk when considering applications for credit, which could result in higher interest rates or difficulty obtaining credit.

Communication and Legal Counsel

Given the complexities and potential consequences involved, open communication between co-signers and the primary account holder is essential. If bankruptcy becomes a possibility, seeking legal counsel from a qualified bankruptcy attorney is strongly recommended. A knowledgeable attorney can provide guidance on the best course of action, whether it involves negotiating with creditors, exploring alternatives to bankruptcy, or navigating the bankruptcy process itself.

Bankruptcy can have far-reaching implications for co-signers on credit cards, impacting their credit scores, financial stability, and future borrowing opportunities. While certain protections exist under bankruptcy law, co-signers should be aware of the potential risks and seek legal counsel to understand their rights and options. By staying informed and communicating openly with all parties involved, co-signers can navigate the complexities of bankruptcy with greater confidence and clarity.