Protecting Your Cosigner in Chapter 13

Why Cosigners Are at Risk

When someone cosigns a loan or co-borrows on a credit account, they are making a legal promise to the creditor: if the primary borrower does not pay, the cosigner will. This is a binding contractual obligation that exists independently of the primary borrower's financial situation.

When the primary borrower falls behind on payments or files for bankruptcy, the creditor does not lose the right to collect. The creditor simply shifts its collection focus to the cosigner. Without any special protection, filing bankruptcy can actually make things worse for cosigners -- because the debtor's filing triggers the creditor to pursue the one person who is still legally obligated and not protected by the bankruptcy court.

This is where Chapter 13 stands apart from every other bankruptcy chapter. Under 11 U.S.C. Section 1301, Chapter 13 provides an automatic codebtor stay that prevents creditors from pursuing cosigners on consumer debts for the duration of the case. But the stay alone is not enough -- how you design your Chapter 13 plan determines whether your cosigner is truly protected or merely given a temporary reprieve.

The Chapter 13 Solution

Chapter 13 gives debtors a unique tool: the ability to propose a repayment plan that pays creditors over three to five years while the codebtor stay keeps creditors away from cosigners. The key to making this work is plan design.

Paying the cosigned debt at 100%

The most effective way to protect a cosigner is to propose paying the cosigned debt at 100 cents on the dollar through the Chapter 13 plan. When the plan proposes full payment of a codebtor-protected claim, the creditor has no basis to seek relief from the codebtor stay because it will eventually receive everything it is owed.

This is true even if other unsecured creditors in the case receive less than 100%. The Bankruptcy Code allows a debtor to treat claims differently based on legitimate classification reasons, and protecting a cosigner is a recognized basis for separate classification under 11 U.S.C. Section 1322(b)(1).

How separate classification works

In a typical Chapter 13 plan, unsecured creditors are grouped into a single class and paid a pro rata percentage of their claims. But when a cosigner is involved, the debtor can propose a plan that places the cosigned debt in a separate class and pays it at 100%, while other unsecured creditors receive a lower percentage.

For example, if you owe $50,000 in total unsecured debt, and $10,000 of that is a loan your mother cosigned, you could propose a plan that pays your mother's loan at 100% and pays the remaining $40,000 in unsecured debt at 25%. The total plan payment would be $20,000 ($10,000 for the cosigned debt plus $10,000 for the other unsecured creditors) rather than $50,000.

What Happens with Partial Payment

If your Chapter 13 plan does not propose to pay the cosigned debt at 100%, the creditor can file a motion for relief from the codebtor stay under 11 U.S.C. Section 1301(c)(2). This subsection allows the court to grant relief when "the plan filed by the debtor proposes not to pay such claim."

Courts interpret "proposes not to pay" broadly. If the plan proposes to pay the cosigned claim at 50%, the creditor can argue that the plan proposes not to pay the other 50%. If the court agrees, it can grant relief from the codebtor stay to the extent of the unpaid portion -- meaning the creditor could pursue the cosigner for the remaining 50%.

This creates a practical dilemma for many Chapter 13 debtors. Paying the cosigned debt at 100% may require higher monthly plan payments or a longer plan duration. But failing to do so exposes the cosigner to collection for the unpaid balance. Working with a bankruptcy attorney to find the right balance is critical.

Strategic Planning for Cosigner Protection

Prioritize cosigned debts in the plan

When designing a Chapter 13 plan, identify every debt that has a cosigner and ensure those debts are addressed specifically. List each cosigner on the bankruptcy schedules (Schedule H) and flag the corresponding claims for codebtor treatment in the plan.

Consider the total cost of protection

Paying cosigned debts at 100% increases the total amount paid through the plan. Before filing, calculate whether the increased plan payments are feasible given your income and expenses. If they are not, consider whether there are other ways to reduce your overall debt load to make room for full cosigner protection.

Communicate with your cosigner

Your cosigner should know that you are filing Chapter 13 and that the codebtor stay will protect them during the case. They should also understand that the protection depends on the case remaining active and the plan being followed. If the case is dismissed or converted, the cosigner loses protection immediately.

Monitor the case

The codebtor stay only lasts as long as the Chapter 13 case is active. Missing plan payments can lead to dismissal, which would terminate the codebtor stay and expose the cosigner. Staying current on plan payments is essential to maintaining cosigner protection.

What if the plan is completed at less than 100%?

If the plan is completed and the debtor receives a discharge, but the cosigned debt was not paid in full through the plan, the cosigner remains liable for the unpaid balance. The debtor's discharge eliminates the debtor's personal liability, but it does not affect the cosigner's obligation. This is another reason why proposing 100% payment of cosigned debts is so important.

Common Cosigned Debts in Chapter 13

• Vehicle loans. Parents frequently cosign car loans for their children. If the child files Chapter 13, the plan can propose paying the car loan through the plan while the codebtor stay protects the parent.
• Private student loans. Federal student loans typically do not have cosigners, but many private student loans do. The codebtor stay protects the cosigner on private student loan debt.
• Credit cards. Joint credit card holders are both liable for the full balance. If one files Chapter 13, the other is protected by the codebtor stay.
• Personal loans. Family members who cosigned personal loans from banks or credit unions are protected during Chapter 13.
• Medical debt. When a spouse or parent signs financial responsibility forms at a medical provider, they may be considered a co-obligor. The codebtor stay can protect them.
• Apartment leases. If a guarantor signed onto a lease and the tenant files Chapter 13, the guarantor may be protected by the codebtor stay for any amounts owed under the lease that constitute consumer debt.

Frequently Asked Questions