Chicago Bankruptcy Question: How are cosigned debts treated in a Chapter 13?

Chicago Bankruptcy Question of the Day: How are cosigned debts treated in a Chapter 13 bankruptcy?  In the context of a Chapter 13 bankruptcy, a cosigned debt is one where both the person filing for bankruptcy protection is liable (the debtor) along with another party, usually one who is not filing for bankruptcy protection (the codebtor).  Some debts, such as most medical bills incurred while parties are married, are joint debts by law, regardless as to who signed what.  The treatment of these debts vary, depending on the nature of the debt and the nature of the relationship between the responsible parties.

When you file for Chapter 13 bankruptcy protection in Chicago, you need to schedule all of the debts that you are liable for.  If there is a cosigner on any of these debts, this must also be disclosed in your bankruptcy petition.  Failure to disclose a debt in order to protect a codebtor is not only a bad idea, but it may be considered bankruptcy fraud.  It is always better to disclose all of your debts and any codebtors to your bankruptcy lawyer and let them go through the various treatment options with you.  The court will issue the automatic stay of bankruptcy, which protects you from your creditors while the case is active.  Along with this, a codebtor stay is issued so that anyone who cosigned for your debts is also protected until your case is discharged.

Many cosigned debts are secured debts, with the most common being financed vehicles.  In these situations, the first determination that must be made is whether or not you want to keep the collateral that the debt is attached to.  If you want to keep the collateral, then it is usually necessary to pay the debt in full at the contract rate of interest.  If this is not done, then once your Chapter 13 is completed and discharged, the creditor will still have a lien on the vehicle for the unpaid debt because the codebtor is still responsible for it.  This scenario happens all too frequently and often defeats the purpose of filing for Chapter 13 in the first place.

If you elect to surrender the collateral that the debt is attached to, or if the debt is an unsecured debt, then in most cases you have a decision to make.  You have the right to treat any unsecured deficiency from the surrender of the collateral and any cosigned unsecured debt as a special class of unsecured creditor within your plan.  This means that you can pay the cosigned debts in full within your plan, even if the rest of your unsecured creditors are only getting pennies on the dollar.  By doing this, you protect the non-filing codebtor from these creditors by paying them off.  You also have the right to treat these debts in the same manner as you do all other unsecured creditors.  If your plan pays your creditors less than dollar for dollar, however, the creditors will have the right to pursue the codebtor after your case has been discharged.  This is where some interesting choices get made.  Usually people who file for Chapter 13 protection will elect to shield their non-filing spouses, parents and significant others but will not hesitate to let the debt fall back on an ex once the case completes.

If you have cosigned debts and are considering filing for Chapter 13 bankruptcy protection in Chicago, you want to have an experienced bankruptcy lawyer advise you as to your options in treating these debts.  A poorly drafted Chapter 13 plan of reorganization could inadvertantly destroy the codebtor's credit, leave a lien on property and get some folks really upset with you.  The Chicago bankruptcy attorneys at Ledford & Wu have years of experience drafting and filing Chapter 13 plans that protect codebtors while still giving clients the financial relief they desperately require.  Call today for a free consultation.

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