When Chapter 7 Leaves Friends or Family Co-signers on the Hook

 Posted on September 12, 2025 in General Bankruptcy Topics

Perhaps you are considering filing for bankruptcy and are wondering how it may affect someone who co-signed a loan for you. Or, maybe you are the cosigner and have just discovered that the person you co-signed a loan for is filing for Chapter 7 bankruptcy.

How does a bankruptcy filing affect a co-signer – or does it? While filing for Chapter 7 bankruptcy in Maryland can wipe out overwhelming personal debt, giving an individual a fresh financial start, when loans are co-signed, the consequences can go far beyond those to the debtor.

It is essential that both the debtor and the cosigner understand their positions in the event that Chapter 7 bankruptcy is filed. While Chapter 7 can erase the debtor’s liability, it may not automatically release the financial responsibility of a cosigner. Before making any financial or legal decisions regarding Chapter 7 bankruptcy, speak to a knowledgeable Hyattsville, MD bankruptcy lawyer.

What is a Co-Signed Loan in Maryland?

A borrower may need a cosigner if he or she has a low credit score, a limited financial history, or insufficient income to meet the lender’s requirements. When a person co-signs a loan, he or she agrees to be equally responsible for the debt should the primary borrower fail to pay. The cosigner (usually someone with a better credit history and credit score) uses his or her financial history to help the primary borrower get approved for a loan or receive a lower interest rate.

Unfortunately, many cosigners are unaware that when the primary borrower misses a payment, it can damage their own credit. If the primary borrower defaults – or files for bankruptcy without discussing the issue – the personal relationship between the primary borrower and the cosigner can be damaged. Co-signers should always read through all the loan documents before agreeing to cosign the loan, and should clearly state all expectations regarding the loan.

How Chapter 7 Bankruptcy Filed by the Primary Borrower Affects the Cosigner

For the primary borrower, filing Chapter 7 bankruptcy can be a real relief. As soon as the bankruptcy petition is filed, an automatic stay takes effect, halting all collection efforts against the filer. Personal liability for most unsecured and secured debts is discharged, thus eliminated. The debtor gets a fresh financial start and can begin rebuilding his or her credit. Unfortunately, things are not as good for the cosigner.

Maryland bankruptcy law does not discharge the cosigner’s obligation, and the lender can immediately pursue the cosigner for the full amount due. If the amount is substantial and the cosigner cannot pay, he or she could face a lawsuit, wage garnishment, and damage to his or her credit.

Alternatives that May Protect a Cosigner During Bankruptcy

Chapter 13 bankruptcy may be a possible alternative, as the co-debtor stay provides some protection. A debtor can also sign a reaffirmation agreement, which means he or she will continue paying the debt despite bankruptcy. The primary borrower may also be able to negotiate with the lender, restructure the loan, or pay down the co-signed debts prior to filing for Chapter 13.

What is the Chapter 13 Codebtor Stay?

One of the biggest differences between Chapter 7 and Chapter 13 bankruptcy lies in the codebtor stay. Once the debtor files for Chapter 13 bankruptcy, the automatic protection of the stay extends to any cosigners. This means that creditors cannot immediately go after a cosigner while the repayment plan is active (usually 3-5 years, as long as the debtor keeps up with his or her payments). This protection prevents wage garnishments, collection calls, and lawsuits against the cosigner, shielding him or her in a way that Chapter 7 bankruptcy does not.

Contact a Greenbelt, MD Chapter 13 Bankruptcy Lawyer

If you have a cosigner for one or more of your loans and are considering filing for bankruptcy, it is extremely important to speak to a Hyattsville, MD bankruptcy attorney from The Law Office of Donald L. Bell to ensure your cosigner is protected. Attorney Bell is currently the chair of the National Bar Association’s Bankruptcy section. With more than 20 years of experience, Attorney Bell has a special focus on saving homes through bankruptcy. Call 301-614-0535 to schedule your free consumer bankruptcy consultation.