What Louisiana Residents Need to Know
When your sister cosigned that car loan to help you get back on your feet, or when you and your spouse opened that joint credit card for household expenses, bankruptcy probably wasn’t on anyone’s mind. Now that financial hardship has knocked on your door, you’re facing tough questions about how your bankruptcy filing will impact the people who trusted you enough to tie their financial reputation to yours.
The relationship between bankruptcy and cosigners creates one of the most emotionally charged aspects of the debt relief process. You’re already dealing with the stress of financial difficulties, and now you’re worried about dragging down someone you care about. The good news is that Louisiana bankruptcy law provides specific protections and options that can help minimize the impact on your cosigners and joint account holders.
Can My Cosigner Still Be Held Responsible for the Debt?
The short answer is yes, but the full picture is more nuanced. When you file bankruptcy in Louisiana, your personal obligation to pay dischargeable debts gets wiped out through the bankruptcy discharge. However, this discharge only applies to you as the primary debtor – it doesn’t extend to your cosigners.
Under Louisiana Civil Code Article 3035, a cosigner (or “surety” in legal terms) remains liable for the full amount of the debt even after your bankruptcy discharge. This means creditors can still pursue your cosigner for payment once your case is complete. The automatic stay that protects you during bankruptcy doesn’t shield cosigners from collection efforts.
For example, if you had a cosigned auto loan with a $15,000 balance when you filed Chapter 7 bankruptcy, and the car was repossessed and sold for $8,000, your cosigner could still be held responsible for the remaining $7,000 deficiency balance. The creditor cannot collect from you after discharge, but they can absolutely pursue your cosigner.
This reality often comes as a shock to both debtors and cosigners. Many people assume that bankruptcy eliminates the entire debt, but Louisiana’s laws on suretyship make it clear that cosigners stepped into a separate legal obligation when they signed those papers.
How Does Bankruptcy Affect Joint Bank Accounts and Credit Cards?
Joint accounts present a different set of challenges than cosigned debts. When you hold a joint account with someone, both parties are typically considered equal owners and equally responsible for any debts incurred.
Joint Bank Accounts
Joint checking and savings accounts can become complicated in bankruptcy. Under Louisiana Revised Statutes Title 11, Chapter 5, Section 541, joint accounts may be considered part of your bankruptcy estate if you have the right to withdraw funds. However, the non-filing joint account holder can claim their portion of the funds by proving their contribution.
If you file Chapter 7 bankruptcy and have a joint savings account with your parent containing $5,000, the bankruptcy trustee might initially claim the entire amount as part of your estate. Your parent would then need to provide documentation showing their contributions to recover their portion. This process can temporarily freeze access to funds that the non-filing party legitimately owns.
Joint Credit Cards
Joint credit card accounts create ongoing liability for both parties. Even after your bankruptcy discharge eliminates your personal obligation, your joint account holder remains fully responsible for the entire balance. Creditors often continue sending statements and demanding payment from the non-filing party.
Many people confuse authorized users with joint account holders. If your spouse is merely an authorized user on your credit card, they typically have no legal obligation to pay the debt. However, if they’re a true joint account holder, they’re on the hook for everything charged to that account.
What’s the Difference Between Chapter 7 and Chapter 13 for Cosigners?
The type of bankruptcy you file significantly impacts how cosigners are affected, and Louisiana law provides different protections depending on your choice.
Chapter 7 Impact on Cosigners
Chapter 7 bankruptcy offers no special protection for cosigners. Once you receive your discharge (typically three to four months after filing), creditors lose the right to collect from you but can immediately turn their attention to your cosigners. This can create a difficult situation where cosigners suddenly face the full collection pressure that was previously shared between you and them.
Chapter 13 Codebtor Stay Protection
Chapter 13 bankruptcy provides much better protection for cosigners through what’s called the “co debtor stay.” Under 11 U.S.C. § 1301, creditors cannot pursue cosigners on consumer debts while your Chapter 13 case is active, as long as you’re making plan payments that address those debts.
This protection can last for the entire three to five years of your Chapter 13 plan. If you successfully complete your plan and receive a discharge, many cosigned debts can be fully satisfied through your plan payments, leaving your cosigners with no remaining liability.
For instance, if you file Chapter 13 and include your cosigned credit card debt in your repayment plan, your cosigner is protected from collection efforts during the entire plan period. If your plan pays 40% of unsecured debts and you complete it successfully, the remaining 60% of that cosigned debt is typically discharged, protecting your cosigner from future liability.
Will Filing Bankruptcy Hurt My Cosigner’s Credit Score?
Your bankruptcy filing alone won’t directly appear on your cosigner’s credit report. However, the aftermath can still damage their credit in several ways.
If creditors begin pursuing your cosigners after your discharge and those cosigners cannot pay, the accounts may be reported as delinquent on their credit reports. Late payments, charge-offs, and collection accounts can significantly impact credit scores.
Additionally, joint accounts that become delinquent will appear on both parties’ credit reports. If you stop paying a joint credit card before filing bankruptcy, both your credit and your joint account holder’s credit will suffer from the missed payments and eventual charge-off.
Some cosigners choose to pay off debts after the primary debtor’s bankruptcy to protect their own credit. While this isn’t legally required if they weren’t planning to pay anyway, it can prevent additional credit damage.
Can I Protect My Cosigner When Filing Bankruptcy in Louisiana?
Several strategies can help minimize the impact on your cosigners, though complete protection isn’t always possible.
Reaffirming Cosigned Debts
You can choose to reaffirm specific cosigned debts in Chapter 7 bankruptcy. Reaffirmation means you agree to remain personally liable for certain debts despite the bankruptcy. Under 11 U.S.C. § 524, reaffirmation agreements must be approved by the court or by an attorney.
While reaffirmation protects cosigners, it also means you lose the benefit of discharge for those particular debts. You need to carefully consider whether you can realistically afford the payments before choosing this option.
Chapter 13 Plan Payments
Filing Chapter 13 instead of Chapter 7 allows you to protect cosigners through plan payments while still obtaining debt relief. Your repayment plan can prioritize cosigned debts, ensuring they’re paid in full or at least to the extent that protects your cosigners from significant liability.
Direct Payment to Cosigners
In some cases, you might arrange to pay cosigners directly so they can handle the debt payments. This approach requires careful documentation and shouldn’t violate any preferential payment rules if done before filing bankruptcy.
What Should I Tell My Cosigner Before Filing?
Honest communication with cosigners before filing bankruptcy can prevent relationships from being damaged and help everyone prepare for what’s coming.
Timing Matters
Give your cosigners as much advance notice as possible. They may want to explore options like refinancing the debt in their name only or paying it off before you file. Some cosigners might prefer to file their own bankruptcy if they’re also struggling financially.
Document Everything
Help your cosigners gather documentation of their contributions to joint accounts and their history with cosigned debts. This information will be valuable if they need to prove their interests in joint assets or demonstrate their payment history to creditors.
Options and Consequences
Explain the different bankruptcy chapters and how each affects cosigners. Be honest about your ability to reaffirm debts or choose Chapter 13. Don’t make promises you can’t keep about protecting them from liability.
Legal Representation
Encourage cosigners to consult with their own attorney. While you and your cosigners might have shared interests in some areas, conflicts can arise that require independent legal advice.
Key Takeaways
Louisiana bankruptcy law creates a complex web of rights and obligations when cosigners and joint accounts are involved. The automatic stay that protects you during bankruptcy doesn’t extend to cosigners, who remain fully liable for cosigned debts even after your discharge. Joint account holders face their own set of challenges, from frozen accounts to ongoing liability for debts.
Chapter 13 bankruptcy offers significantly better protection for cosigners through the codebtor stay, which can shield them from collection efforts during your repayment plan. Chapter 7 provides no such protection, meaning cosigners face immediate exposure once you receive your discharge.
The impact on cosigners’ credit scores depends largely on how they handle their ongoing obligations after your bankruptcy. While your filing won’t directly appear on their credit reports, the resulting collection efforts and account delinquencies can cause significant credit damage.
Protecting cosigners requires careful planning and often involves difficult choices about reaffirmation or Chapter 13 filing. Open communication with cosigners before filing bankruptcy gives everyone the best chance to minimize negative consequences and preserve important relationships.
Frequently Asked Questions
Can creditors contact my cosigner during my bankruptcy case?
For Chapter 7 cases, yes – creditors can contact cosigners immediately since there’s no codebtor stay protection. For Chapter 13 cases, creditors cannot contact cosigners about consumer debts as long as you’re making plan payments and the debt is being addressed through your plan.
What happens if my cosigner files bankruptcy too?
If your cosigner also files bankruptcy, they can discharge their liability on the cosigned debt just like you did. However, if there’s collateral involved (like a car), the creditor might still repossess and sell it to recover what they can.
Can I add my cosigner to my bankruptcy case?
No, each person must file their own bankruptcy case. Spouses can file joint cases, but other cosigners like parents, siblings, or friends must file separately if they want bankruptcy protection.
Will my cosigner be notified when I file bankruptcy?
The bankruptcy court doesn’t automatically notify cosigners, but creditors often inform them once they receive notice of your filing. It’s better to tell your cosigners yourself before they hear it from creditors.
Can my cosigner sue me for having to pay the debt after my bankruptcy?
Louisiana Civil Code Article 3047 gives cosigners (sureties) the right to seek reimbursement from the principal debtor, but your bankruptcy discharge typically eliminates their ability to collect from you personally. They might have claims against your non-exempt assets in some circumstances.
What if I can’t afford to reaffirm the cosigned debt?
Don’t reaffirm debts you can’t afford just to protect cosigners. Reaffirmation creates ongoing personal liability that survives bankruptcy. If you can’t afford the payments, reaffirmation might just delay your financial problems rather than solving them.
Contact Us
If you’re facing bankruptcy and worried about how it will affect your cosigners or joint account holders, you don’t have to make these difficult decisions alone. At E. Orum Young Law, we help Louisiana residents work through the complexities of bankruptcy law while minimizing the impact on their loved ones.
Every situation involving cosigners and joint accounts is unique. The strategies that work best for your circumstances depend on factors like the types of debts involved, your ability to make payments, your cosigners’ financial situations, and your long-term goals. We’ll review your specific situation and help you choose the approach that provides the most protection for both you and the people who’ve supported you.
Don’t let concern for your cosigners prevent you from getting the debt relief you need. With proper planning and the right legal strategy, it’s often possible to obtain a fresh start while minimizing the burden on others. Take the first step toward resolving your financial difficulties and protecting your important relationships by scheduling a free case review today.
