What Your Bankruptcy Filing Means to Your Co-debtors
When a couple files jointly for bankruptcy and receives a discharge, all their debts that are eligible for discharge are so discharged, regardless of whether they are jointly owned or not. However, many debtors who file bankruptcy have joint debts with others besides a spouse who is filing as part of the same petition. This can often lead to a messy situation post discharge if the debtor does not fully understand the implication of the debtors filing and communicate that to the non-filing co-debtor.
Perhaps the debtor signed a car note with a sibling, or maybe a credit card with a child. A lot of times the debtor owns and operates a business, which is then often a co-debtor on a lot of debts. And of course there is the scenario where the debtors spouse is a co-debtor, and the spouse does not want to file bankruptcy.
No matter the scenario, this much is clear- only the filing debtors liability is discharged in the bankruptcy. Whoever else was liable prior to the debtors filing is still liable after the debtors discharge.
Therefore, if you think your filing is going to also extinguish someone elses liability, you are making an incorrect assumption. For instance, that $20,000 car note deficiency that you and your son were being sued on prior to your bankruptcy filing can continue against your son regardless of your filing in a chapter 7. The collection efforts against you and your business ends only as against you when you file. The second mortgage note that you and your non-filing spouse hold jointly will continue to show as deficient on the non-filing spouses credit report, and the non-filing spouse could still be sued for defaulting on the note.
This is not to say your co-debtors will not reap any benefits from your filing. A lot of debtors who own businesses own failing businesses, so while the creditor can proceed against the business, it often has no assets to recover. Other times the non-filing co-debtor will be judgment proof, so the creditor will not bother to pursue that party.
Most importantly, a debtor can protect a non-filing co-debtor in a chapter 13 proceeding by paying the creditor at 100% in the debtors chapter 13 plan. This is not even a sacrifice if the debtors plan was to pay the creditors at 100% regardless, but when the debtor is proposing to pay its creditors less than 100%, the debtor can opt to pay the debts with a non-filing co-debtor at 100% so that the creditor does not go after that party. In that scenario, since the debtor is in a chapter 13 payment plan, the debtor must be able to come up with enough money to be able to make that payment at 100% within the confines of the plan.
If you are filing bankruptcy, make sure to tell your attorney about all of your co-debtors. The attorney can then explain to you the possible ramifications to that party. A lot of times debtors file because of a joint debt, so it is crucial you understand what your bankruptcy filing can and cannot achieve in respect to your co-debtor.