Get a New Financial Start with this New Year

Get a new financial start for 2018. Stop creditor pressures immediately, write off all or most debts, and responsibly deal with the rest.


An Overall New Financial Start

Get a new start by discharging (permanently, legally writing off) all or most of your debts. If you have mostly consumer or small business debts you have two main choices about how to make this happen.

A New Start with Chapter 7

With Chapter 7 “straight bankruptcy” you get a new start very fast. As soon as your case is filed most of your creditors can’t collect their debts against you. They can’t go after your money or your property. Then usually about 3-4 months later the bankruptcy court enters an order discharging your debts. As quick as that you become debt-free. The only exceptions would possibly be debts you want to keep and special debts you can’t discharge. Debts you might want to keep could include a vehicle loan or home mortgage. Debts you can’t discharge include recent income taxes, unpaid child and spousal support, and criminal fines.

Imagine if you filed a Chapter 7 case this month. Immediately your creditors could no longer chase you or anything of yours. All or most of your debts would forever be gone by April or May. The remaining critical debt or two you’d be able to handle sensibly. That quickly you’d have a new financial start.

A New Start with Chapter 13

With Chapter 13 “adjustment of debts” the new start is more nuanced, but sometimes much better.

Just as with Chapter 7 your creditors can’t take any action to collect their debts as of the moment you file your case. But under Chapter 13 that protection from creditors lasts not just a few months but for years. The final discharge of debts happens much later but in the meantime you can get many benefits unavailable under Chapter 7. You can deal in creative ways with special debts. You often have much more flexibility with secured debts like home mortgages and car loans. Same thing with income taxes and child support arrearages, among others, that can’t be discharged. Plus you get protection from collection actions against any co-signers that you don’t get under Chapter 7.

You finish your Chapter 13 payment plan in usually 3 to 5 years. Whatever debts you have not paid off get discharged. You are debt-free with limited exceptions like a home mortgage you want to still pay.

Under Chapter 13 you get immediate relief and a new start through a reasonable payment plan based on your budget. Then when that plan is done it’s followed by a full new start with (virtually) no remaining debts.

So, if you filed a Chapter 13 case this month, immediately your creditors could not chase you or any co-signers. You’d enter into a doable payment plan to handle your special debts in ways much better than Chapter 7. And when that plan is paid off you’ll have a full new financial start.


Student Loans in Bankruptcy

Student loans can sometime be written off in bankruptcy, but it can be quite hard to meet the necessary conditions to do so.


The Discharge of Student Loans

Student loans are NOT among those debts that can NEVER be “discharged”—legally, permanently written off on bankruptcy. Bankruptcy law does totally exclude certain kinds of debts from being discharged–one example is unpaid child support.

Instead student loans are among those debts that are discharged IF they meet certain conditions. They are somewhat like income taxes, which can definitely get discharged. With income taxes there is a list of conditions; with student loans there is only one to meet. Yet, discharging a student loan can be much more difficult than discharging an income tax debt. That’s because the conditions for discharging income taxes are mostly straightforward, compared to the much vaguer condition for student loans.

The Vague Condition of “Undue Hardship”

Bankruptcy law allows a student loan to be discharged if “excepting such debt from discharge… would impose an undue hardship on the debtor and the debtor’s dependents.” Section 523 (a)(8) of the U.S. Bankruptcy Code. So if you can show that your student loans are causing “undue hardship,” you can discharge those loans.

What’s “Undue Hardship”?

The problem is in figuring out what that phrase means.

In practical terms what does the statute consider a “hardship”? And what more does it take for a “hardship” to rise to the required level of an “undue” hardship?

The phrase “undue hardship” did not originate in Congress. It came from a Commission on the Bankruptcy Laws created by Congress way back in the early 1970s to help guide a total overhaul of our bankruptcy laws.

When Congress used that term in the statute on student loan discharge quoted above, it did not define it. Many other important terms used in the Bankruptcy Code are directly defined within the Bankruptcy Code. See Section 101 on “Definitions.” But not this one.

A Practical Standard for “Undue Hardship”

Congress left it to bankruptcy judges and courts of appeals to apply this term to people’s circumstances. They’ve focused on coming up with practical conditions required to have a hardship that is serious enough to be considered to be “undue.”

Over the decades most of the bankruptcy courts in the country have largely settled on three hurdles to jump for undue hardship:

1. To make the required payments on the student loan under your current income and expenses would leave you unable to maintain even a minimal standard of living.

2. This current situation of being unable to maintain a minimal standard of living is expected to continue over all or most of the repayment period of the student loan.

3. You’ve made a real effort at paying the student loan and/or qualifying for programs to address the debt responsibly.

Important Considerations

  • You must ask for a hardship discharge during your bankruptcy case or you’ll continue to owe your student loan(s). This is done through what is essentially a lawsuit in the bankruptcy court. You must convince the bankruptcy judge that you’ve jumped the above three hurdles to get a decision in your favor. 
  • The timing of your request can make all the difference. You may not qualify for undue hardship now, but you may do so in the future. An example would be if you have a worsening chronic medical condition. Talk with your bankruptcy lawyer about reopening your bankruptcy case later when you better qualify for undue hardship.
  • Consider filing a Chapter 13 “adjustment of debt” bankruptcy now if you may not qualify now but will in the next few years. You could likely not make any student loan payments for a few years. Then later in your 3-to-5-year case, or as soon as you’d qualify, you’d ask the court for an undue hardship determination, while your Chapter 13 case is still open.


It’s often not easy to meet all three conditions of the undue hardship standard. It can be a rather lengthy and expensive legal process. But an increasing number of people have large student loans as a major portion of their debts. If that’s you, get legal advice from an experienced and conscientious bankruptcy lawyer. The bigger your student loans, the bigger their impact on your future, and all the more important to understand your rights and options.


The Chapter 7 and 13 Trustees, and the U.S. Trustee

The Chapter 7 trustee decides whether to liquidate anything, the Chapter 13 oversees your case, and the U.S. Trustee is the enforcer. 


When you hear the term “trustee,” that could refer to various people or roles.

Some are not directly related to the bankruptcy process. For example, in many states the “trustee sale” is the final event of a home foreclosure. A trustee legally conducts the foreclosure instead of your lender.

More broadly, a trustee is a person given certain powers to administer property or to fulfill some other tasks on behalf of others.

In bankruptcy, a trustee gets assigned to your case when you file a Chapter 7 or Chapter 13 case. You and your bankruptcy lawyer will meet with that trustee briefly. Sometimes you’ll have more contact with the trustee, especially in a Chapter 13 case.  Generally speaking these trustees have certain powers over you and your property, and act on behalf of your creditors.

There is also the U.S. Trustee. He or she usually works behind the scene; in most consumer cases you’ll never meet this person.

The Chapter 7 Trustee

Chapter 7 “straight bankruptcy” is a liquidation procedure, although in consumer cases usually no liquidation takes place. (Nothing of yours gets liquidated and sold to pay your creditors if everything you have is “exempt,” or protected.) The Chapter 7 trustee is the person who determines whether or not you have any assets to liquidate. In those cases in which the trustee sells debtor assets, he or she is also responsible to distribute the proceeds to the creditors as required by law.  

The Chapter 7 trustee presides at the so-called “meeting of creditors.” That’s usually the only time you’ll see him or her. This 10 minute or so meeting takes place within about a month after you and your bankruptcy lawyer file your case. At this short meeting the trustee will ask you some (usually quite simple) questions about your bankruptcy documents. Your lawyer will prepare you for them and help at the hearing as needed.  

The trustee is assigned to your case from a “panel” of potential trustees. Generally your lawyer can’t predict or influence who will be your trustee. 

See Section 704 of the U.S. Bankruptcy Code about the duties of a Chapter 7 trustee.

The Chapter 13 Trustee

Chapter 13 “adjustment of debts” is a procedure involving the court approval and the implementation of a payment plan. The Chapter 13 trustee administers and oversees the process.

This trustee has a number of roles. The primary one is to enforce your obligations under Chapter 13 law. For example, the trustee tries to ensure that you pay your creditors what they are entitled to. The trustee

  • reviews your proposed payment plan and other court-filed documents,
  • presides at your so-called “meeting of creditors”
  • can raise objections to your plan with the bankruptcy court as appropriate
  • after court approval of your plan, receives your plan payments and distributes them to the creditors as specified under the terms of the plan
  • files motions with the bankruptcy court if you are not complying with the plan
  • at the end of your case tells the court when you have successfully completed your plan obligations

Unlike the Chapter 7 trustees, there is usually a single “standing Chapter 13 trustee” assigned to all the Chapter 13 cases filed in a particular area. Since most handle a large volume of cases most of them have a staff of assistants. Your lawyer will very likely have a long-standing working relationship with the trustee and staff. You’ll know in advance who will be your Chapter 13 trustee.

See Section 1302 of the Bankruptcy Code about the duties of the Chapter 13 trustee.

The United States Trustee

The U.S. Trustee is the enforcer within the bankruptcy system—the watchdog over the bankruptcy process.” You generally hope to avoid hearing from the U.S. Trustee—it’s often not good news.

As described on its website:

The United States Trustee Program is a component of the Department of Justice that seeks to promote the efficiency and protect the integrity of the Federal bankruptcy system.  To further the public interest in the just, speedy and economical resolution of cases filed under the Bankruptcy Code, the Program monitors the conduct of bankruptcy parties and private estate trustees, oversees related administrative functions, and acts to ensure compliance with applicable laws and procedures.  It also identifies and helps investigate bankruptcy fraud and abuse in coordination with United States Attorneys, the Federal Bureau of Investigation, and other law enforcement agencies.

The main responsibilities of the local U.S. Trustee in consumer cases is to:

  • appoint and supervise Chapter 7 and Chapter 13 trustees
  • take legal action to prevent fraud and abuse of the bankruptcy system
  • investigate and refer matters to the appropriate enforcement authorities (as mentioned above) for criminal prosecution

See 28 U.S. Code Section 586 for the duties of the U.S. Trustee.


The Bankruptcy Clerk and the Bankruptcy Judge

Usually you have little or no interaction with the bankruptcy clerk or the bankruptcy judge, but they are both important in your case. 


Last week we told you about the debtor and different kinds of creditors in bankruptcy. Today we get into the bankruptcy court and bankruptcy judge. Again, it’s much easier to be comfortable with the process if you know who the main players are and what each one does.

Bankruptcy Clerk

The clerk is the person who, together with his or her staff, handles the clerical tasks of the bankruptcy court. Some of these tasks are quite important, affecting your interests and that of your creditors. It may seem to be “just paperwork,” but is still crucial for the smooth running of your case.

The clerk:

  • processes the paperwork that your lawyer files electronically at the start of your case and thereafter
  • maintains your bankruptcy file at court securely
  • mails out the official notices providing deadlines and certain hearings for you, creditors, the bankruptcy trustee
  • follows the many bankruptcy laws and official procedures in the processing of your case

Your bankruptcy lawyer interacts with the clerk and his or her staff to make sure that everything proceeds as it should. In most cases you will not have anything directly to do with them. 

Bankruptcy Judge

The bankruptcy judge is the person who ultimately has authority over your case. Every case is assigned to one judge. 

You are not likely to meet your judge in any straightforward Chapter 7 or 13 case. If you do it would usually be for a very specific purpose. For example, in a Chapter 7 case you might need to attend a short “reaffirmation” hearing. In a Chapter 13 case you might need to attend a payment plan “confirmation” hearing. But again, in most cases you’ll never see your judge. The most you usually see of him or her is a signature on official documents.

These judges are officers of the federal court system, but they are not full federal judges. Technically they are “judicial officers of the United States district court.” There are between 1 and 4 federal “districts” in each state, to which bankruptcy judges are assigned. Most federal districts have multiple bankruptcy judges, although some with smaller populations have only 1. Unlike regular federal judges who are appointed for life, bankruptcy judges are appointed to terms of 14 years. See 28 U.S. Code Section 152.

If there is any dispute in your case, the judge resolves such disputes. In Chapter 7 cases he or she decides whether a debt should be discharged (legally written off) or not if that is in dispute. In Chapter 13 cases the judge decides on the terms of your Chapter 13 plan, if you and the Chapter 13 trustee or a creditor disagree. 

The decision of the bankruptcy judge can be appealed, either to a local federal district judge or sometimes to a regional 3-judge Bankruptcy Appellate Panel. That very seldom happens because of the time and expense involved.


Who Does What in Your Bankruptcy Case?

The key players in bankruptcy are the debtor, creditors, the bankruptcy clerk and judge, and the bankruptcy trustee and the U.S. Trustee. 


Bankruptcy can be confusing. It helps to know the main players and what each does. We’ll cover the first two listed above today. Next time we’ll cover the rest.


The debtor is the person or business entity filing the bankruptcy case.

The debtor has to qualify to file bankruptcy. Sometimes qualifying is easy, sometimes it’s harder. The qualifications are different for Chapter 7 “straight bankruptcy” than they are for Chapter 13 “adjustment of debts.” The “means test” is most important in Chapter 7, while in Chapter 13 having “regular income” and not too much debt.

A debtor has a number of “duties.” These mostly involve honestly completing some forms for the bankruptcy court and attending a so-called “meeting of creditors.” You’re also required to “cooperate as necessary” with the bankruptcy trustee and the U. S. Trustee. (We’ll get into this more coming up when we tell you about the different trustees).

The debtor’s most important job is to be honest and responsive. You need to do this first with your bankruptcy lawyer, so that the lawyer can advise and protect you. Then, through the lawyer’s guidance, do the same with the bankruptcy court and the other players in the process.

See these Sections of the U.S. Bankruptcy Code: Section 109 on “Who may be a debtor,” and Section 521 on “Debtor’s duties.”      


The creditors are of course the businesses and individuals to which the debtor owes debts.

Creditors participate in your bankruptcy case, or often don’t participate, mostly based on the kind of debt owed.

Creditor’s debts are either secured or unsecured. “Secured” means that the debt is legally tied to something you own. That gives the creditor the right to take that something from you if you don’t pay the debt. A debt can be secured by something you bought at the time you created the debt, like a vehicle loan. It can be secured by something you owned beforehand, like a personal loan secured by your possessions. Or it can be secured by operation of the law, like an income tax or judgment lien. A creditor has more leverage over you if its debt is secured and you want to keep that “security.” See Section 506 of the Bankruptcy Code on “Determination of secured status.”

Unsecured debts can be “priority” or “general unsecured.” “Priority” debts are legally favored for various reasons. The main examples among consumer debts are recent income tax debts and any child or spousal support. “Priority” debts generally get paid in full before anything gets paid on “general unsecured” debts under various bankruptcy procedures. See Section 507 on “Priorities.”

For most people most of their creditors have “general unsecured” debts. Those are all debts that are either not secured or not “priority.” They include most credit card balances, medical bills, personal loans, bounced checks, utility bills, vehicle loan deficiency balances, unsecured personal loans, and countless other kinds of unsecured obligations.

Creditors Getting Involved

Creditors can theoretically be involved in the bankruptcy process in a lot of ways. However, they tend to be less involved than you expect. They often decide that getting involved is not worth their cost or effort. Secured creditors do tend to get involved so that you make appropriate arrangements depending on whether you want to keep their “security.”

Sometimes other creditors have grounds to challenge your ability to “discharge”—legally write off their debts.  Your lawyer will inform you if there seem to be any such grounds. Be sure to tell him or her if you have any creditors who may have an emotional stake in your financial life (such as ex-spouses or ex-business partners.) These sometimes get involved in your case, whether doing so would financially benefit them or not.


Satisfying the Debtor Education Requirement

You can’t complete a personal bankruptcy and receive a discharge of debts without meeting the so-called debtor education requirement.


The “Credit Counseling” and “Debtor Education” Requirements

If you are an “individual” filing a bankruptcy case you can’t file a bankruptcy case without first undergoing “credit counseling.” (An “individual” is a person, not a business entity.) This requires you to get “an individual or group briefing (including… by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in preforming a related budget analysis.” (See Section 109(h) of the U.S. Bankruptcy Code.) It’s easier than this might make it sound. You must do this during the 180 days before filing, and you can’t file without doing so. (See our very last blog post about “credit counseling.”)

Then after filing bankruptcy, you must also meet the “debtor education” requirement. This means completing “an instructional course concerning personal financial management.” If you don’t do this, the case will end without you getting the discharge (legal write-off) of your debts. This applies to both Chapter 7 (Section 727(a)(11))  and Chapter 13 (1328(g)) of the Bankruptcy Code.

Today’s blog post is about this requirement.

What IS “Debtor Education”?

It is a class “designed to assist debtors in understanding personal financial management.” It’s usually done online, but can also happen over the phone, or even in person.

The “nonprofit budget and credit counseling agencies” providing the class must be approved by the United States Trustee, based on certain “applicable standards.” (See Section 111(c)(2) of the Bankruptcy Code.) At the heart of these standards an agency must:

provide adequate counseling with respect to a client’s credit problems that includes an analysis of such client’s current financial condition, factors that caused such financial condition, and how such client can develop a plan to respond to the problems without incurring negative amortization of debt

Make Sure to Do “Debtor Education” on Time

You get a certificate of completion after completing “debtor education,” your proof that you did so. Tell your bankruptcy lawyer so that he or she can file this certificate at court. This must be done before your case is completed. Otherwise, if a certificate of completion isn’t in your file when your bankruptcy case is ready to be closed the judge won’t sign the usual order discharging your debts. Then your bankruptcy case ends without a discharge of your debts.

This is not good. Most likely your main goal in filing bankruptcy is to discharge your debts and get a financial fresh start. You certainly don’t want to go through all that effort and expense without reaching this goal.

There’s a Likely Solution But It’s Expensive and Risky

If you’re reading this after your case has closed without you meeting the “debtor education” requirement, there’s likely a solution.

You could still take the “debtor education” class—after your case is closed. At that point, your lawyer may be able to persuade the judge to reopen your case, accept your certificate of completion, enter the discharge order, and then again close your case. This would get you the discharge of debts and solve the problem.

But it’s much better to avoid this situation. For 3 good reasons:

  • These otherwise unnecessary steps would cost you hundreds of dollars more in “re-opening” filing fees and additional attorney fees.
  • While your case is closed without a discharge, all your creditors could take action to collect on their debts.
  • There’s some risk that a judge would not go along with this attempted solution.

So, take the “debtor education” course on time—preferably soon after filing your case—avoiding these unnecessary costs and risks.


Satisfying the Credit Counseling Requirement

The credit counseling requirement is not at all hard to meet. You have to do it before you can file a bankruptcy case, so get it over with.


You can’t file an individual bankruptcy case without first taking this one, relatively easy step—the so-called “credit counseling.” It’s probably helpful to consider it nothing more than a bureaucratic formality. It almost never serves as any kind of helpful “counseling.” But you definitely need to take of it and appropriately to avoid problems when you file bankruptcy.  

The Requirement

The part of the U.S. Bankruptcy Code titled “Who may be a debtor,” says you can’t file a bankruptcy unless you

received from an approved nonprofit budget and credit counseling agency… an individual or group briefing (including a briefing conducted by telephone or on the Internet) that outlined the opportunities for available credit counseling and assisted such individual in preforming a related budget analysis.

See Section 109(h) of the Bankruptcy Code.

This is easier than it sounds.

What’s Actually Required

Not much.  It’s actually a simple procedure you do on the internet, or by phone if you prefer. You simply provide some information about your debts, income, and expenses, and then are almost always told that your income is not sufficient to pay for your expenses.

The practical benefit of this “counseling” is that you get an emailed certificate saying that you’ve completed “credit counseling.” That certificate lets you file bankruptcy. You can’t without it. Your lawyer attaches it to your initial bankruptcy petition.

180 Days before Filing

The “counseling” session must take place “during the 180-day period” before filing bankruptcy. So be sure that you’re going to be filing bankruptcy within that length of time after you do it. Otherwise, if your bankruptcy filing is delayed you may have to do the counseling again closer to your filing date.

Usually people run into the opposite problem, putting it off too long. Be sure not to get into the position of needing to file bankruptcy quickly but not being able to. Get the credit counseling step out of the way as soon as you know that you’re filing soon.

Reason for this Requirement

The supposed reason for this requirement was to encourage people to consider options other than bankruptcy. Some say that its real purpose was to bureaucratically discourage people needing bankruptcy relief. In the end it does not seem to be an effective disincentive.  

For example, the United States Government Accountability Office has issued a report with the following practical conclusion:

The counseling was intended to help consumers make informed choices about bankruptcy and its alternatives. Yet… by the time most clients receive the counseling, their financial situations are dire, leaving them with no viable alternative to bankruptcy. As a result, the requirement may often serve more as an administrative obstacle than as a timely presentation of meaningful options.

Who To Contact to Get this “Counseling,” and How Much Does it Cost?

The providers of this service must first be approved by the U. S. Trustee. (That’s an agency which oversees certain aspects of the bankruptcy system.) You can find a list of the approved agencies for your area on the U.S. Trustee’s website. In the dropdown list click on your state. (Look for your local federal district if you state has more than one).

Frankly, this will lead you to a long and not very helpful list of approved providers. They vary widely in quality, convenience, and cost. So ask your bankruptcy lawyer which one he or she recommends, and for other helpful information about that particular provider.


Protecting Your Co-Signer Better through a Chapter 13 Bankruptcy

Chapter 13 protects your co-signer better through the special co-debtor stay. It has its own limits but provides the strongest protection.  


Two weeks ago we discussed how to protect yourself from both your co-signer AND the creditor owed the co-signed debt. 

Then last week was about protecting your co-signer in the limited ways that Chapter 7 can. It assumed that protecting your co-signer was a very high priority for you. You are willing to pay the co-signed debt once you discharged (wrote off) all your other debts.

The Limitations of Chapter 7

But as we just said Chapter 7 “straight bankruptcy” helps in only limited ways. Here are situations where it can’t help. If:

  • even after bankruptcy, you can’t afford to pay the co-signed creditor’s monthly payment
  • whether or not you can afford those payments, you’ve fallen behind and don’t have the money to catch up
  • the co-signed creditor has “accelerated” the debt—declared it to be all due at once, which you can’t pay all at once
  • the creditor has sued your co-signer, and already has or will soon have a judgment against him or her

In all these scenarios nothing stops the creditor from pursuing your co-signer.

Chapter 7 Protects You but Not Your Co-Signer

As soon as you and your bankruptcy lawyer file a Chapter 7 case, the creditor could no longer chase you. You’d be protected by the “automatic stay” against virtually all creditor collection actions. (See Section 362 of the U.S. Bankruptcy Code.)  And after your case would be completed a few months later that debt would be forever discharged. The creditor would have no further recourse against you. (See Section 727(b) of the Bankruptcy Code.)

Because of this the creditor would pursue your co-signer instead. The creditor may not even be willing to talk with you or accept your payments because it thinks it’s legally not supposed to.

The Special Chapter 13 Co-Debtor Stay Solution

If you instead file a Chapter 13 “adjustment of debts” case you can usually protect your co-signer from the creditor. This protection is enabled by the “co-debtor stay,” which is available only under Chapter 13.

The co-debtor stay specifically protects your co-signer—“any individual that is liable on [a consumer] debt with the debtor.” The “creditor may not act, or commence or continue any civil action [that is, lawsuit], to collect all or any part of a consumer debt of the debtor.” (See Section 1301 of the Bankruptcy Code.)

So the co-debtor stay stops an attempt by the creditor to collect the debt through the co-signer.

Limits to the Co-Debtor Stay

This may not be quite as good as it sounds right off.

First, the creditor can get around the co-debtor stay simply by filing a motion in the bankruptcy court saying that your Chapter 13 payment plan is not proposing to pay the debt in full. (Section 1301(c)(2).)

One way to prevent this is for your lawyer to structure your payment plan to pay that debt in full.  If your original plan did not do this, amend your plan to pay that debt in full after the creditor’s motion. Bankruptcy judges in most parts of the country will allow you to favor your co-signed debt in this way.

Second, there’s a problem even if a creditor takes no action when you’re not paying the co-signed debt in full. The co-debtor stay expires when your Chapter 13 case is completed. To whatever extent you didn’t pay off the debt by that time, the creditor can then pursue your co-signer. This includes any accumulated interest, late fees, etc.

The only way to prevent this is to make sure that you pay the co-signed debt in full during your Chapter 13 case. You’ll usually have up to 5 years of protected time to do so.

Third, the creditor can pursue your co-debtor if the debt benefitted the co-debtor instead of you. After asking permission from the court the creditor can pursue the co-signer if it “received the consideration” for the debt. (See Section 1301(c)(1).) That is, you can’t protect a co-signer if YOU actually co-signed the debt tor the CO-SIGNER’S benefit.

Exceptions to the Co-Debtor Stay

The co-debtor stay does not apply to and help with:

  • non-consumer (business) debts
  • income tax debts (with spouses or business co-obligors)
  • debts entered into by your co-signer “in the ordinary course of [his or her] business”


Notwithstanding these conditions and exceptions, Chapter 13’s co-debtor stay can be a remarkable and effective tool for protecting your co-signer.


Protecting Your Co-Signer in a Chapter 7 Bankruptcy

Chapter 7 bankruptcy helps you protect your co-signer, mostly by discharging your other debts so that you can pay the co-signed one.


Last week we wrote about protecting yourself from both your co-signer and from the creditor owed the co-signed debt. 

If you decide to file bankruptcy you want to discharge (legally write off) all the debts that you can.  Then you can—if you want and are able to—pay any obligation you feel morally compelled to. Especially if you’re no longer friendly with your co-signer you want to end any legal liability you may have to him or her. And you want to end the legal liability you have to the creditor itself. So you legally discharge those two obligations to protect yourself.

But now let’s focus on protecting the co-signer. Let’s assume that you feel very strongly about doing all you realistically can do for that person. You want to do what you can to prevent the creditor from coming after him or her. Or if your co-signer has already paid part or all of the debt, you’d like to make your co-signer whole. How could bankruptcy help in this?

Chapter 7 and Chapter 13 each have advantages and disadvantages in protecting your co-signer. We start today with Chapter 7.

How Chapter 7 Helps

Chapter 7 “straight bankruptcy” helps mostly indirectly. Filing this type of bankruptcy would discharge all or most of your other debts. That should make it at least somewhat easier to pay the co-signed debt if you wanted to.

Be sure to list both your original creditor and its co-signer on your bankruptcy schedules. Do so both because you are required by law to list all creditors and it’s prudent to cover those distinct obligations. You owe the creditor based on your debt agreement. You likely owe your co-signer based on whatever agreement you have with him or her, oral or otherwise. Both obligations would very likely be discharged in your Chapter 7 case. (This assumes that there is no fraud-based objection by either). So you would very likely have no legal obligation to pay either of them.

Protecting Your Co-Signer through Chapter 7

The discharge in Chapter 7 happens quite quickly—usually within about four months from filing. So then IF and WHEN you wanted to, you could start making the monthly payments to the co-signed creditor. If your co-signer had started making these payments, you could informally consent to start making them again.

Your legal obligation to pay this would by this time have been discharged in bankruptcy. You certainly don’t want to create a new legal commitment. So you should make clear that you are paying strictly voluntarily.

If your co-signer has already paid the entire debt you could similarly consent to reimburse him or her.

The same applies if the co-signer has paid part of the debt. You could arrange to make the remaining payments directly to the creditor, and then work on reimbursing the co-signer through payments afterwards—or whenever you wanted.

Again, in all situations make clear that whatever you choose to pay is strictly voluntary.

No Legal Constraint on Paying This Debt

One advantage to Chapter 7 regarding a co-signed debt is the flexibility it gives you to pay the debt. As Section 524(f) of the U.S. Bankruptcy Code makes clear, nothing “prevents a debtor from voluntarily repaying any debt.”

Because Chapter 7 is such a short procedure there is nothing preventing you from paying a discharged debt. In contrast, a Chapter 13 case usually last 3 to 5 years, during which time you are in a formal payment plan. During that period of time you can’t favor any creditors except as the law specifically allows you to do.

Nevertheless, Chapter 13 does give you other advantages with co-signed debts, which we’ll get into next week.


Crucial Facts about Co-Signed Debts in Bankruptcy

Bankruptcy protects you from your co-signed creditor and also from your co-signer. Be sure to cover any legal obligation to your co-signer. 

Protecting Only Yourself

Assume that you and your co-signer are both legally liable on a debt to a creditor. And you can’t afford to pay the debt.

Let’s focus today on protecting yourself. If you can’t pay the debt, you have to consider two separate obligations—to the creditor itself, and to the other signer.

Your Obligation to the Creditor

The obligation to the creditor is based on your promise to pay the debt. This obligation can most likely be discharged (legally written off) in a bankruptcy case. The creditor could object to the discharge based on your alleged fraud or misrepresentation, or sometimes on other exceptions. But those objections or exceptions don’t apply to most debts.

Your Probable Obligation to Your Co-Signor

Usually you have a distinct legal obligation to the other person legally liable on the debt. What exactly that obligation is depends on the circumstances.

Assume the other person co-signed to enable you to get credit. Then there could be a stated understanding that, if the co-signer ever had to pay the debt, you’d have to pay back the co-signer. You may have effectively promised to pay back the co-signer if necessary. That obligation to repay may not be stated but just presumed by both people.

Or it’s possible that the stated or presumed understanding was that you wouldn’t have to re-pay your co-signer. The co-signer could have said “I’ll co-sign and if you can’t pay the debt I’ll take care of it without you having to pay me back.” Maybe not likely but it’s possible.

But now assume instead you co-signed to help the other person, and you got no benefit from the credit acquired. Then you may have no legal obligation to the other person.

So again you may or may not have a legal obligation to the co-signer.

Being Practical

There’s a good chance the creditor is going to pursue whoever is legally liable to it. That would usually be both you and the other signer. So you need to protect yourself both from the creditor itself and from any potential liability to the co-signer. A bankruptcy would likely discharge both obligations, protecting you from both.

So when you file bankruptcy, it’s critical to list both the creditor and your co-signer on your schedule of creditors. Otherwise you could remain liable to your co-signer after your bankruptcy case is finished.

Can Your Co-Signer Object?

Just like the creditor, your co-signer could try to object to the discharge of your obligation to him or her. But such an objection would have to be based on your fraud, misrepresentation, or similar bad behavior in the incurring of the debt. As stated above, these objections are rare. The co-signer would have to show that you somehow fooled him or her into being the co-signer. For example, if you had assured her that your credit was good when it wasn’t, or that your income was much more than it really was, those could be valid grounds for objecting to the discharge of your obligation to the co-signer.

Although relatively rare, these objections tend to be raised out of anger by people with personal connections to you. Former friends, ex-spouses, ex-business partners may react out of spite and anger because they have a personal axe to grind. Plus they may have compromising information (or think they do) providing grounds for objection more than conventional creditors would.

If you suspect that a co-signer may react this way, explain the situation thoroughly to your bankruptcy lawyer. He or she can access the situation, give you appropriate advice, and take any appropriate action to minimize your risks.