Chapter 13 bankruptcy and co-signing loans

Although bankruptcy has become significantly more common in recent years due to the economic recession and its aftermath, there are still many misconceptions about the legal process of bankruptcy. For example, many people believe that filing for bankruptcy will result in the loss of any and all assets, including homes, cars and personal belongings.

However, that is not necessarily the case. Filing for Chapter 13 bankruptcy, as opposed to Chapter 7, will allow you to maintain possession of your assets by establishing a court-monitored payment plan under which you will either partially or fully repay your creditors. Generally, that plan will be in effect for three to five years, during which time you will be monitored by a court-appointed bankruptcy trustee.

During that time, you will be in what is best described as financial limbo. You must make all payments to your creditors, and send any extra income, such as raises and bonuses, to them so that they receive the maximum amount of payment on your debts. You may not take on any new debt or make significant purchases without the approval of your bankruptcy trustee.

In addition, you probably will not be able to co-sign a loan for another person. It is unlikely that your bankruptcy trustee will approve the co-signing, because it would effectively promise your income to a new creditor in the event that the person for whom you are co-signing fails to make the required payments. Further, your credit rating has suffered as a result of your bankruptcy filing, which means that you probably would not receive a very good loan deal.

Source: Fox Business, “Don’t Co-Sign a Loan While in Chapter 13 Bankruptcy,” Erica Sandberg, June 6, 2012