Are co-signers protected and should both spouses file?

Are co-signers protected?

If you file a Chapter 7, your co-signers, guarantors or other persons otherwise liable on your debt are not protected. The creditor may proceed against them pursuant to the debt agreement. Only the person filing bankruptcy is protected.

If you file Chapter 13, your co-signers, guarantors and other persons otherwise liable on your debt will be protected to the extent the following conditions are met:
• Your Chapter 13 proposes to repay the debt.
• The debt was not incurred in the ordinary course of a debtor’s business, that is, it is a consumer debt.
• The co-signer did not benefit from the proceeds of the debt.

Chapter 13 has a special provision that prohibits creditors from contacting or trying to collect from co-signers as long as the debt is being paid in Chapter 13. The purpose of the protection is to allow the debtor to repay the debt without the creditor being allowed to bring undue hardship on the debtor by trying to collect from a co-signer, who is usually a relative, friend or fellow worker.

Should both spouses file?

The answer to this question is generally yes.
Although it is not required by law, it is usually to their advantage to do so for the following reasons:
If you do not file for bankruptcy, then you do not get the protection of bankruptcy, which means that the creditors can continue to pursue the non-filing spouse.
• In community property states such as Texas, both husband and the wife are usually liable on the debt.
• Bankruptcy fees and costs are set up on the basis of “2 for 1” if you are married at the time the bankruptcy is filed, even if you are separated and even if a divorce is pending. If only one spouse files the fees and costs are the same. If each spouse files separately, the fees and costs are doubled.
• There are exceptions to the rule that both spouses should file. For example, if the marriage is recent, no debts have been incurred during the marriage, and one of the spouses had no debt when they married, then this spouse would not be liable on the other spouse’s debt and there would be no need for both to file.

This question can become a very intricate and involved legal issue that requires advice and counsel with a competent bankruptcy attorney.

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*Joseph W. Shulter is Board Certified in Consumer Bankruptcy Law by the Texas Board of Legal Specialization.