Hi Folks,

So with all of the economic uncertainty, for people who have been in long standing Chapter 13 cases, it might be a good time to re-examine your circumstances.

There are a number of reasons why someone might file for a Ch. 13, such as:

I was ineligible for a Ch. 7 at the time.

My house was going into foreclosure.

I was being garnished and I couldn't afford to pay the attorney's fees for a Ch. 7

I was making too much money to qualify for a Ch. 7

There are a number of reasons why someone might file for a Ch. 13, but because the Chapter 13 plan lasts for several years (3 or 5 years in most cases), people's circumstances might change.

One option, if your circumstances change, is to convert your case to a Ch. 7 Bankruptcy.  The Ch. 7 Bankruptcy usually completes in a few short months.  You will not have monthly payments to the Court, and it will discharge most common types of debt.

Converting your Ch. 13 Bankruptcy case to a Ch. 7 Bankruptcy case is a great option to explore if your circumstances have changed.

For example, if you were making good money when you filed the Ch. 13 case, but have since lost hours, or lost your job altogether, you might qualify for a Ch. 7 case.

If you filed for a Ch. 13 case to save your house or your car, and your needs have since changed, a conversion to a Ch. 7 might make a lot of sense.  I have been talking to a client today who needed a Ch. 13 for a number of reasons, one of which was in order to keep her car.  The original reasons for her Ch. 13 Bankruptcy case have largely resolved themselves and she no longer wants to keep her car, or the car loan, so conversion to a Ch. 7 makes a lot of sense.

A conversion can be a powerful tool, but it is not for everyone.  Remember that if you are dealing with long term debt, after the Ch. 7 Bankruptcy case concludes, you will have to address that debt.  For loans where there is secured collateral (such as a car or a house) and there are still outstanding arrears on the loan, you will have to address those arrears soon after the Ch. 7 case concludes.  If you had monthly payments that were reduced as a result of your Ch. 13 plan, you can expect those payments to go back to normal.

Despite the shortcomings of conversion to a Ch. 7, this solution can be a great relief to a lot of people and it can help many people start their post-Bankruptcy life off sooner than if they had completed their Ch. 13 plan.  Only an experienced Bankruptcy attorney can advise you as to whether or not a conversion from a Ch. 13 to a Ch. 7 makes sense for your circumstances, but it is worth looking at as a potential option.

What happens if I file for Bankruptcy but I co-signed on a loan for someone else?

Many of my clients have had a conversation similar to this one.

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Daughter:  Mom, I really need a new car, but I can't get approved for a loan without a co-signer.

Mom:  Well, I'm not sure about this.  Can you afford the payments?

Daughter:  Mom, I swear, I will make the payments on time every month.  You won't have anything to worry about.

Mom:  Alright.  I suppose.  As long as you can afford to make the payment, I don't see that it would be a problem.

Now a couple of years later, Mom finds herself in financial trouble and needs to file for Bankruptcy, but she suddenly realizes that doing so might affect someone else.  I have seen many occasions where someone changes their mind about filing for Bankruptcy because the person that they co-signed for erroneously led them to believe that the item financed would get repossessed.

So here are the facts.  This is a common scenario.  It is so common, in fact, that the Bankruptcy Schedules have a specific section for co-signers.

Remember that original promise?  “I swear, I will make the payments on time every month.”  Those words are important.  If the person that made that promise doesn't follow through on their obligations, the lender (usually a bank or a credit union) would have come after YOU.  So that promise is important.

There are two potential scenarios here:

1)  The promise has been kept.  In this case the payments are being made on time every month.  If this is the case, then there is no problem at all if you file for Bankruptcy because the item financed (usually a car) cannot be repossessed if the payments are current.

2)  The promise has been broken.  In this case, there is a default on the loan.  This is not your fault, and if you choose not to file for Bankruptcy the lender can (and will) come after you for the balance on the loan.  In this case, filing for Bankruptcy is not what is causing the item to be repossessed…the default in payments is what is causing it.  By filing for Bankruptcy, all you are doing is eliminating one of the two people that the bank can go after.

So as you can see, there is really no downside to filing for Bankruptcy if you co-signed for another person.  If they maintain their payments (like they promised to do at the start of this process), then no negative effects can happen to them.  In fact, they will even continue to get the benefit of the on-time payment history on their credit report.  If they do not maintain their payments, the bank will repossess the financed item, but that would have happened whether you filed for Bankruptcy or not.

As a practical matter, there are a couple of considerations that you should keep in mind if you are filing for Bankruptcy and you have co-signed for another person.

1)  That person has a right to know that you filed for Bankruptcy.  In point of fact, there is a section of your Bankruptcy schedules that is specifically designed to put them on notice that they are now solely responsible for the loan.  If the person that you co-signed for is someone that you have a close relationship with, it is best to speak to them in person about this situation, because often times the Bankruptcy notification that they receive can be intimidating and confusing.

2)  The person that you co-signed for gets the benefit of your automatic stay on collections, but this can actually backfire on the co-signer.  When you file for Bankruptcy, a powerful law preventing any sort of collection activity goes into effect.  This means that creditors cannot ask for money from you during the Bankruptcy case, but this also means that creditors that you want to pay, will cease all payment arrangements.  If you are used to automatically paying the loan through an auto pay system that will stop while the Bankruptcy is in place.  Unfortunately for some people who are not paying close attention to their finances, this means that during the three or four months that a Chapter 7 Bankruptcy is active no automatic payments are being made.  If the borrower does not manually make the payment, the loan can go into default quickly.  So, it is very important to tell the person that you co-signed for that they need to manually contact the lender during the Bankruptcy and make the full payment.  Also, if they are used to paying late because of a “grace period” you should encourage them not to rely upon that grace period, and instead pay the payment on time each month.

3)  Make sure that you tell your Bankruptcy attorney about any loans that you may have co-signed.  That attorney needs this information in order to properly prepare your Bankruptcy schedules and you never want to inadvertently mislead the court about your financial situation.  I know that it can be embarrassing to file for Bankruptcy and oftentimes people don't want their close friends/relatives to find out about this process, and those close friends/relatives are precisely the people that you might have co-signed for.  Those potential feelings of embarrassment are minor when compared to the possibility of failing to properly disclose matters to the Bankruptcy court, so talk to your attorney about the situation, and resist any temptation to conceal any fact about your financial situation.

Don't let a co-signer situation affect your decision to file for Bankruptcy.  Your attorney is the best source of guidance on this issue, but in general, this situation is not hard to resolve and you should not let it hold you back from getting a fresh start.