Once a Chapter 7 bankruptcy is filed, all collection efforts and activities must stop because of the bankruptcy’s automatic stay. But, it’s important to know that the Chapter 7 automatic stay does not extend to your cosigners. Therefore, your creditors are free to pursue them in an effort to collect the debt. Fortunately, if you decide to file a Chapter 7 bankruptcy, there are steps you can take to protect your cosigners from collection efforts by creditors. The options that are available to you include: reaffirming the debt or paying off the debt.
Prior to receiving a discharge in Chapter 7, you can choose to reaffirm a debt where there is a cosigner. When you reaffirm a debt, you re-obligate yourself to pay that debt in full. In most cases, reaffirming a debt is not advisable; however, it may be necessary in order to protect a cosigner from your creditors.
The other choice you can make is to pay off the debt once the bankruptcy has concluded. After a Chapter 7 discharge you are no longer obligated to pay back any discharged debts. However, you can voluntarily pay off a debt post-bankruptcy. The greatest benefit of paying off the debt voluntarily, rather than reaffirming it, is that should a situation arise whereby you no longer want to pay the debt, you can do just that without any legal consequences. But, if you stop paying the debt, and the cosigner fails to make payments, the creditor can pursue the cosigner at will.
One final note: It is important to distinguish a “cosigner” from an “authorized user”. An authorized user has NO liability on an account they are authorized to use. Thus, a creditor cannot pursue debt owed on an account from the authorized user. A cosigner, as we have discussed above, is liable on a debt and can be pursued by a creditor.