Potential Problems for CoSigners and CoDebtors When a Bankruptcy Petition is Filed

As you may be aware, cosigners and codebtors are people (or companies) who are obligated to pay a debt if the client does not pay it.  Therefore, when a client decides to file bankruptcy and that client owes a debt where a cosigner or codebtor is involved, it could potentially cause a major problem to develop.

This is why it is extremely important to obtain precise information about any cosigners or codebtors the client(s) have that are associated with their debts.  And to be certain you (or your attorneys) protects the client(s) in the best way possible, the attorney may need to review the contract that was signed regarding this debt.  You will need to find out:

1.   Was the debt secure or unsecure?
2.   Were the client(s) the primary or secondary client(s) on the contract?
3.   Were any items used for collateral no longer in the possession of the client(s), or that the client(s) are surrendering in the bankruptcy?

After obtaining the answers to each one of these questions the attorney will need to find out if this client qualifies for a Chapter 7 or Chapter 13.  Both Chapters treat debts somewhat differently but you need to verify the facts before the attorney can advise the client(s) properly.

Let me give you an example:  An attorney discussed a case with me that he was working on.  A lady had stopped by the office to ask about a debt she cosigned on a $27,000 credit card with her nephew.  The nephew was filing bankruptcy and he wanted to know how this would affect his aunt who was not filing.

If the nephew files a Chapter 13 and has enough income to pay back his unsecure creditors 100%, this issue could possibly be uneventful.  The debt could be paid in full through the Chapter 13 Plan which is filed with the bankruptcy petition.

However, a problem could occur if the nephew does not have enough money left over to pay the unsecured creditors 100%.  He may only have enough income to propose a 50% Chapter 13 Plan. What will happen to the remaining 50% that will not be paid through the bankruptcy?

One of the more interesting features of Chapter 13 law is something called the COCLIENT(S) STAY.  Set out in Section 1301(a) of the Bankruptcy Code, the CoClient(s) Stay disallows collection action on consumer debt against co-client(s) or the person filing for bankruptcy.

A TYPICAL SCENARIO

A client files a Chapter 13 bankruptcy and includes a debt owed to TV Centers of America for a new television.  The clients mother cosigned the loan for her son.  The clients Chapter 13 protects the mother from collection efforts for as long as the client remains in the Chapter 13 and continues making the payment to the trustee.

However, the obligation of the coclient(s) do not disappear.  If the client repays a consumer debt at 30 cents on the dollar in the Chapter 13, the clients cosigner will be liable for the remaining 70% after the bankruptcy case is discharged.   But, during the time the client(s) are in a Chapter 13, the coclient is protected.   Often in these cases, client(s) will establish special payment CLASSES in their Chapter 13 Plan to pay co-signed debts in full to protect the co-client(s).   In other situations; such as when the cosigner is an exspouse, the co-client(s) may be left exposed.

WOULD YOU LIKE MORE INFORMATION LIKE THIS?

Information like the article above are extremely valuable for attorneys and non-attorneys working in Chapter 7 and Chapter 13 debtor bankruptcy law.  To obtain your 75 page Operations Manual and Initial Intake Forms, visit:

http://www.coloradobankruptcytraining.com/products_intakeform.html

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