Protection for the Non-Filing Spouse or Co-Debtor
When an individual files for bankruptcy they may have obtained a loan with a friend or family member. By doing this, they are on the loan together. In Bankruptcy, if the debtor is on a loan with another person who has not chosen to file bankruptcy; the non-filing person obtains the same benefits of the protection of the bankruptcy case as the debtor that did file from that particular creditor.
After someone files for bankruptcy the protection from creditors is automatically put into place. This protection prevents any creditors from collecting or taking any action to secure their interest on a loan against the bankruptcy filer.
At the same time, this protection is extended to a non-bankruptcy filer as well. This is a very generous benefit that a co-signor has even when they have not filed for bankruptcy. However, this benefit is not as far reaching as it may seem.
When a person files for bankruptcy they are either trying to reorganize their debts by making a monthly payment under Chapter 13, or they are seeking a completed discharge of their debts subject to the liquidation of their assets under Chapter 7.
In either case, if the individual that filed for bankruptcy cosigned a loan with another party that has not filed for bankruptcy, both will be protected from any collection efforts. However, if the individual that filed for bankruptcy decides to return the item back to the creditor or defaults on the loan while in bankruptcy that the non-filer cosigned a loan for, then the non-filer is no longer protected and the creditor can start making collection attempts against the non-filer.
Unfortunately, the non-filer will be on the hook unless he or she files a bankruptcy themselves, whereas the filing party receives the benefit of a complete discharge of the debt if they defaulted on the loan.