What Happens to Your Cosigner If You File Chapter 13 in Arizona?

Life can feel hectic when you’re juggling debt payments and trying to keep your finances afloat. Throw in the worry of what might happen to a good friend who cosigned your loan, and it’s easy to feel anxious.

Since cosigners often stand by you in times of need, it’s only fair to understand how a Chapter 13 bankruptcy affects them, too. Let’s walk through the important points so you’ll know what to expect and how to keep your relationships and finances as steady as possible.

Chapter 13 Bankruptcy and the Cosigner

Filing under Chapter 13 is designed for individuals looking to reorganize debt. In this system, you propose a repayment plan that generally lasts three to five years. During that time, you submit regular payments to a trustee, who distributes those funds to creditors.

When a cosigner is part of your financial picture, they’ve agreed to share responsibility if you don’t pay. This usually involves items like credit cards, car notes, or other personal loans. Their name on that obligation means the creditor can pursue them for payment if you don’t follow through. That’s exactly why cosigners worry about your filing and how it might affect them.

The Codebtor Stay: Protection for Cosigners in Chapter 13

One helpful element of Chapter 13 is known as the “codebtor stay.” Once you file, an automatic stay kicks in, preventing most lenders from collecting directly from you. With the codebtor stay, that protection can extend to the individual cosigner on a consumer debt. In other words, the creditor may have to wait before going after the cosigner during the life of your bankruptcy case.

This stay offers breathing room for the person who helped you out. They typically won’t face harassing calls or lawsuits from creditors while your Chapter 13 plan remains active. But keep in mind that this stay hinges on the debt being classified as a consumer debt, not a business one. It also requires that your cosigner be a person, not a business or separate entity.

Consumer Debt Defined

Under bankruptcy law, consumer debt usually refers to debts taken on for personal or household purposes. This can include credit cards used for groceries, clothes, or utility bills. Personal loans for everyday family expenses may also fall into this category.

On the other hand, business obligations typically do not get this codebtor-stay protection. If your cosigner backed a business loan, they could lose out on that safeguard. In Arizona, the interpretation of consumer debt is in line with federal standards, so you’ll see these same distinctions in local courts.

When Creditors Can Challenge the Codebtor Stay

Creditors can request the court to lift the codebtor stay in specific scenarios. If they succeed, the lender regains the ability to pursue the cosigner. They’ll usually file a motion and explain precisely why they believe the stay should go away.

The court holds a hearing, and you (and your cosigner) can respond to or oppose the request. It’s wise to stay on top of each hearing or deadline. Missing a court date without filing a response can leave your cosigner unprotected.

Grounds for Lifting the Stay

While there are a few reasons a creditor might seek to lift that stay, three main grounds often appear:

• The cosigner gained most of the benefits from the debt. For example, if your cosigner was the one using the financed car exclusively, the court may see it as fair for creditors to go after them instead of waiting for your plan to finish.
• The proposed Chapter 13 plan does not pay the cosigned debt at all. If your repayment plan ignores that particular obligation, the creditor might argue that the cosigner should pay.
• The creditor can show that if the stay remains, their interest would be harmed beyond repair. The loan collateral may be losing value quickly, or the debt is never addressed in full.

If the court grants the request, those collection calls or lawsuits may resume for your cosigner. You’ll want to keep communication open so nobody is caught off guard.

Life After Chapter 13: Discharge, Dismissal, and Cosigner Liability

Results for your cosigner will hinge on how your Chapter 13 case concludes. If you finish the plan successfully, you will receive a discharge for the eligible debts.

Still, it’s vital to remember that your cosigner is not automatically free and clear of the original agreement. A Chapter 13 discharge applies to you and not necessarily to them. If a cosigned debt is not fully paid through the Chapter 13 plan, the cosigner may remain responsible even after your case closes.  Because of this, it is important to consider carefully how you want to handle a cosigned debt in your Chapter 13 bankruptcy.  If possible, you may decide to pay it off in full to protect your cosigner.  Or, it may be overall more financially beneficial to allow the cosigner to resolve his or her liability after your bankruptcy case closes.

If your case is dismissed before completion, the codebtor stay ends immediately. Creditors are then free to pursue both you and your cosigner for any outstanding obligations. This scenario can arise if you fall behind on the plan or do not follow other important court requirements.

Table: Chapter 13 Outcomes and Cosigner Impact

Contact Yusufov Law Firm PLLC for Guidance

If you feel burdened by debt but want to look out for a trusted friend or relative who cosigned your loan, we welcome your questions. Yusufov Law Firm PLLC in Tucson, Mesa, and Phoenix strives to help people resolve financial issues in ways that fit their unique circumstances.

Call us at (520) 745-4429 in Tucson or (480) 788-0098 in Mesa/Phoenix, or visit our Contact Us page to reach us online. We’ll discuss how a Chapter 13 plan or other options may protect both you and your cosigner. Creating a workable plan is often the first step toward peace of mind.