What Happens if my Co-Signer on a Loan Files for Chapter 7 Bankruptcy

Receiving news that someone you co-signed a loan with has filed for bankruptcy can be alarming. You may have received a notice from the bankruptcy court or a letter from the lender. This situation often creates immediate financial anxiety and a host of pressing questions. What does this mean for you? Are you now responsible for the entire debt? How will this affect your credit?

The Legal Reality of Co-Signing a Loan

Before diving into the bankruptcy process, it is essential to revisit the legal commitment you made when you co-signed. When you co-sign a loan, you are not just a character reference. You are a co-borrower.

The lender sees both you and the other person as equally and fully responsible for the debt. This is known as “joint and several liability.” It means the creditor can demand payment from:

• The primary borrower
• The co-signer (you)
• Both parties simultaneously

The lender does not care who makes the payment, as long as the payment is made. You both signed a contract promising to pay 100% of the debt.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is often called “liquidation” bankruptcy. The person who files (the “debtor”) is seeking a “fresh start” by having certain debts legally erased, or “discharged.”

To do this, a court-appointed official called a trustee may take and sell the debtor’s non-exempt assets (property not protected by law) to pay back creditors. In Mississippi, many filers find that most or all of their property is protected by exemptions. The end goal for your co-signer is to receive a court order (the discharge) that eliminates their personal legal obligation to pay back the debts included in the bankruptcy.

The Automatic Stay: A Shield for Your Co-Signer, Not for You

The moment your co-signer files for Chapter 7 bankruptcy, a powerful legal injunction called the “automatic stay” goes into effect. This “pause button” immediately stops all creditors from attempting to collect debts from the person who filed. It stops wage garnishments, repossessions, and harassing phone calls.

However, this protection is personal to the filer. The automatic stay does not protect you as the co-signer.

Because you are also 100% liable for the debt and you did not file for bankruptcy, the creditor is legally free to turn to you for payment. In fact, the co-signer’s bankruptcy filing is often the event that triggers the lender to begin collection actions against you immediately.

Your Co-Signer’s Discharge and Your Continued Liability

This is the most direct answer to your question. A few months after filing, your co-signer will likely receive their Chapter 7 discharge. This discharge order wipes out their personal liability for the loan. They can no longer be legally sued or garnished for that debt.

This does not make the debt disappear. It only removes one of the parties responsible for it.

The debt itself, and the lien on any collateral (like a car or house), still exists. Your signature on the original loan contract remains fully valid. When your co-signer’s liability is discharged, the lender will look to you as the sole remaining party responsible for 100% of the balance.

Think of it as a stool with two legs. The bankruptcy filing has kicked one leg out from under it. The stool does not just fall; you, as the remaining leg, are now expected to support the entire weight.

Will My Co-Signer’s Bankruptcy Appear on My Credit Report?

This is a common and very valid fear. The answer is no.

Another person’s bankruptcy filing cannot appear on your credit report. Your credit history is separate and unique to you. The co-signer’s Chapter 7 filing will not lower your credit score.

However, the loan you co-signed is on your credit report, and this is where the danger lies. If payments are missed—whether before, during, or after the co-signer’s bankruptcy—those missed payments will be reported on your credit history. If the account goes into default, that default will be listed on your report.

Your credit is not harmed by the bankruptcy itself, but it is extremely vulnerable to any non-payment of the co-signed loan.

How Lenders Typically React When a Co-Signer Files

Once the lender receives notice of the bankruptcy, they will pivot their collection efforts directly to you. You can expect to:

• Receive a Letter: The lender will likely send you a formal letter informing you that your co-signer has filed for bankruptcy and that you are now solely responsible for the payments.
• Receive Phone Calls: Expect collection calls to begin, requesting payment in full or demanding that you resume the regular payment schedule.
• Face Acceleration: Many loan agreements contain an “ipso facto” or “bankruptcy default” clause. This clause states that if any party on the loan files for bankruptcy, the entire loan balance can be “accelerated”—meaning the full amount becomes due immediately.

How Specific Loan Types Are Affected

The type of loan you co-signed heavily influences the lender’s actions and your options.

Secured Debts (Auto Loans and Mortgages):
A secured debt is a loan backed by property (collateral). The lender has a “security interest” in that property.

Auto Loans: If the loan is for a car, the lender has two goals: get its money or get the car. Since your co-signer is protected by the automatic stay, the lender cannot repossess the car from them (at least not without court permission). But they can demand that you, the co-signer, either:

• Make the payments.
• Pay the loan in full.
• Work with the primary borrower to surrender the car.

Mortgages: If you co-signed on a home loan, the stakes are much higher. To prevent foreclosure, the mortgage payments must continue. The lender will pursue you for any missed payments and expect you to take over the full monthly note.

Unsecured Debts (Personal Loans and Credit Cards):
An unsecured debt has no collateral backing it. The lender’s only remedy is to sue the borrowers for the money.

Since your co-signer is protected by the automatic stay and will soon have their liability discharged, the creditor will view you as their only source of repayment. They will pursue you for the full balance and can file a lawsuit against you, which could lead to a judgment and wage garnishment in Mississippi.

The “Co-Debtor Stay”: Why It Does Not Apply in Chapter 7

You may hear or read about a “co-debtor stay.” This is a provision in Chapter 13 bankruptcy that does offer protection to co-signers. In a Chapter 13 case, the debtor repays a portion of their debts over a three-to-five-year plan. The co-debtor stay prevents creditors from going after the co-signer as long as the debtor is making their plan payments.

Chapter 7 has no co-debtor stay. This is a key distinction. Because there is no repayment plan in Chapter 7, the law does not provide any protection for co-signers. You are exposed from the day your co-signer files.

What Are My Options as the Remaining Borrower?

You are in a difficult position, but you have options. It is important to act quickly and not ignore the situation.

Option 1: Take Over the Payments
This is the most straightforward solution. You simply continue paying the loan as agreed. This keeps the account in good standing and protects your credit. If it is a car loan, you get to keep the car (assuming you are the one using it).

Option 2: Refinance the Loan in Your Name Only
This is often the best long-term solution. You apply for a new loan in your name alone to pay off the co-signed debt. This officially removes the co-signer and the old, defaulted loan. The challenge is that you must qualify for the new loan based solely on your own credit and income, which may be difficult if the loan amount is high.

Option 3: Negotiate with the Lender
If you cannot afford the full payment or the accelerated balance, you can try to negotiate. You can ask for a loan modification (lower interest rate or extended term) or a settlement (paying a lump sum that is less than the full balance). Lenders may be willing to negotiate, as settling with you is easier than suing you.

Option 4: Surrender the Collateral (for Secured Loans)
If the loan is for a car you do not want or cannot afford, you can arrange for a “voluntary surrender.” You give the car back to the lender. The lender will sell it at auction.
Warning: If the car sells for less than the loan balance, you will be responsible for the “deficiency balance.” This deficiency is now an unsecured debt, and the lender can still sue you for it.

Option 5: Pay Off the Loan
If you have the savings, paying the loan off in full is the cleanest way to end the problem.

When to Consider Your Own Financial Options

The co-signer’s bankruptcy may put an impossible strain on your budget. If this co-signed debt, on top of your own financial obligations, makes it impossible for you to pay your bills, it may be time to evaluate your own financial health.

If you cannot afford to pay this debt, you have the same legal options your co-signer had. You may need to speak with an attorney to discuss whether a Chapter 7 or Chapter 13 bankruptcy filing is the right solution for you. Filing your own bankruptcy could discharge your liability for this co-signed loan and your other qualifying debts.

Navigating Mississippi Bankruptcy and Co-Signed Debts

Handling these issues on the Mississippi Gulf Coast means dealing with specific district courts and local practices. All bankruptcy cases for residents of Gulfport, Biloxi, Hattiesburg, and the surrounding counties are filed in the U.S. Bankruptcy Court for the Southern District of Mississippi.

A local attorney can provide guidance on how lenders in our area, from local credit unions to large national banks, typically handle co-signed accounts in bankruptcy.

Dealing with a co-signer’s bankruptcy is stressful. You are being held responsible for a debt that you may not have been paying, and you are facing aggressive collection actions. Do not ignore the notices.

We Can Help You Assess Your Situation

If your co-signer has filed for bankruptcy in Mississippi and you are now facing collection actions, you need clear legal advice. Our team can help you review the loan agreement, assess your liability, and determine the best path forward.

Contact a Gulf Coast bankruptcy attorney today for a confidential consultation to discuss your circumstances and learn your options.