Bankruptcy and Co-Signers: Understanding Your Legal Protections

Bankruptcy can have far-reaching implications for both primary debtors and their co-signers. Understanding the legal protections available to co-signers and their rights in the event of the primary debtor’s bankruptcy is crucial for mitigating financial risks and protecting interests.

At the Bankruptcy Advisory Centre, we have over 30 years of experience dealing with personal insolvency and bankruptcy, so we work with our clients to ensure they know all the options available when dealing with Bankruptcy and Co-Signed debt. Here is our guide and what you need to know:

Co-Signer Liability

• Joint Liability: Co-signers, also known as guarantors or co-debtors, are typically jointly and severally liable for the debt alongside the primary debtor. This means that creditors can pursue a co-signer or guarantor for the total amount of the debt if the primary debtor defaults.
• Financial Obligations: Guarantors are legally obligated to repay the debt if the primary debtor fails to do so, regardless of the circumstances leading to the default, including bankruptcy.

Bankruptcy Impact on Co-Signers

• Automatic Stay: An automatic stay is imposed upon the primary debtor’s bankruptcy filing, preventing creditors from pursuing collection actions against both the debtor and guarantor. This includes lawsuits, wage garnishments, and debt collection calls.
• Co-Signer Protections: While the automatic stay provides temporary relief for co-signers, their liability for the debt may not be eliminated by the debtor’s bankruptcy discharge. A guarantor may still be pursued for repayment by creditors after the bankruptcy proceedings conclude.

Co-Signer Protections under Bankruptcy Law

• Co-Debtor Stay: In some cases, co-signers or guarantors may be eligible for protection under the co-debtor stay provision, temporarily halting collection actions against co-signers while the primary debtor’s bankruptcy case is pending.
• Part IX/9 Debt Agreement: Co-signers may benefit from the co-debtor stay in Part IX/9 debt agreement cases, where the debtor proposes a repayment plan to repay all or a portion of the debt over an agreed period, usually three to five years.

Guarantor Liability in Bankruptcy

• Non-Dischargeable Debts: Certain types of debts, such as child support, spousal payments, student loans, and debts resulting from fraud or intentional wrongdoing, may be non-dischargeable in bankruptcy. It is important to know that co-signers remain liable for these debts after the primary debtor’s bankruptcy discharge.
• Creditors’ Rights: Creditors retain the right to pursue co-signers for debt repayment following the primary debtor’s bankruptcy discharge, subject to applicable bankruptcy protections or limitations.

Seeking Advice From Qualified Bankruptcy Experts

• Legal Consultation: Guarantors and co-signers facing potential liability due to the primary debtor’s bankruptcy should seek legal advice from qualified bankruptcy professionals. Legal professionals can also guide you in defining your rights and obligations, developing possible strategies for protecting assets, and minimising financial exposure.
• Reviewing Documents: Before agreeing to co-sign a loan or financial obligation, individuals should carefully review all legal documents, including loan agreements and co-signer agreements, to understand the extent of their liability and any potential consequences in the event of bankruptcy.

Bankruptcy and Co-Signers

Bankruptcy can have significant implications for guarantors and co-signers in Australia, who may remain liable for the debt despite the primary debtor’s bankruptcy discharge.

At the Bankruptcy Advisory Centre, we can advise on the legal protections available to co-signers on the impact of bankruptcy on their liability. We also offer professional advice when necessary for the essential steps for safeguarding financial interests and mitigating risks associated with co-signing arrangements.

We can help you stay informed and be proactive when considering being a guarantor or co-signer so that you can navigate the complexities of bankruptcy and protect yourself from undue financial hardship.