As a bankruptcy attorney, I rarely advocate for people to co-sign any debt for another person. The rare situation in which co-signing may be acceptable would be for spouses to co-sign on a debt for the other. This is because there could be recourse for the spouses to address the debt in a possible future divorce if things go south in the marriage due to the debt. Other than that, just don’t. Don’t co-sign for another. Just don’t.
In a co-signer situation, there are three key people involved: the creditor, the debtor, and the co-signer. The creditor is the person who is giving the thing, a car finance company or an apartment leasing company. The debtor is the person who is supposed to pay and usually has control of the thing, such as a car or an apartment. The co-signer is the person who had to guarantee or support the debtor’s promise to pay for the thing.
In the original situation, the creditor may go after or sue either the debtor or the co-signer for a failure to pay. There is no requirement that the creditor must go after the debtor first. The co-signer and debtor are equally liable and responsible for the money to the creditor.
When a debtor files bankruptcy, they might change the relationship between the creditor, the debtor, and the co-signer. The way the relationship changes depends on what happens with the thing. If the car has been repossessed or the debtor has been evicted from the apartment, the debtor will remove their obligation to pay for the thing. Upon the filing of the bankruptcy, the debtor is removing their obligation on the debt, breaking the creditor’s ability to go after the debtor for the money. At this point, the creditor can only go after the co-signer for the monies due to the creditor.
For example, a co-signer signs for a $5,000 car loan for a debtor. The debtor makes 2 payments before defaulting and not making any more payments. The creditor repossesses the car and the creditor is owed $4,600. At this point, the creditor can sue the debtor or the co-signer for the $4,600. However, if the debtor then files bankruptcy, they remove their obligation to pay the $4,600 and can discharge the debt through their bankruptcy. This leaves the co-signer with the sole obligation to repay the $4,600 to the creditor for a car that has been repossessed.
However, if the debtor intends to keep the car or the apartment and re-promises to pay the debt, the relationship between the creditor, the debtor, and the co-signer may not change at all. It is important to note that once the debtor files bankruptcy, the co-signer should receive notice of the debtor’s bankruptcy. This would be an important time for the co-signer to have a conversation with the debtor about the debtor’s intentions for the thing. The co-signer should also consider meeting with a bankruptcy attorney to understand their rights in relation to the bankruptcy.