Chapter 7 bankruptcy has impacts beyond your personal financial situation.
Often, there are unintended consequences that affect other areas of your life. Some others that can be impacted include co-signers who may have assisted you in getting a loan. Let’s take a look at the impact on them and others in the article below.
What Happens to Co-Signers and Personal Guarantees in Chapter 7 Bankruptcy?
At The Mitten Law Firm, we often meet with clients who are seeking relief through Chapter 7 bankruptcy and believe it will wipe the financial slate clean entirely. While it’s true that Chapter 7 can discharge many of your personal debts, one area that’s frequently misunderstood—and often overlooked—is what happens to co-signers and guarantors on those debts. If someone else helped you secure a loan, you need to understand how your bankruptcy may affect them.
This issue hasn’t been widely covered, but it can have significant consequences—both financially and relationally. In this blog, we’ll break down what happens to co-signers and personal guarantees when you file for Chapter 7 in Michigan, and what steps you can take to protect those who’ve supported you.
Why Co-Signers and Guarantors Still Matter After Bankruptcy
When someone co-signs a loan, they’re making a legal promise to pay if you default. The same applies to personal guarantors on business or private loans. Filing for Chapter 7 will discharge your legal obligation to repay the debt, but it does not release your co-signer or guarantor from their responsibility.
As a result, creditors are free to pursue repayment from that individual once your case is discharged. This legal reality often comes as a surprise—and can create friction between the filer and their co-signer if it’s not addressed upfront.
How Co-Signers Can Be Affected By Your Chapter 7
Here at The Mitten Law Firm, we’ve seen the real-life effects this can have on our clients’ families, friends, and business partners. Some of the most common outcomes include:
- Continued liability: The debt is discharged for you, but not for your co-signer. They remain fully responsible for the balance.
- Strained relationships: If your co-signer was unaware of your filing, they may feel blindsided when they’re suddenly contacted by creditors.
- Aggressive collection: Creditors can sue the co-signer, garnish their wages, or pursue other legal remedies to recover the full amount owed.
Common Scenarios and Legal Impact
Let’s consider a few scenarios we often address with our clients:
If you have a co-signed loan—like a car loan or personal line of credit—and include it in your Chapter 7 filing, your obligation to repay it is discharged. However, that does not mean the debt disappears entirely. The creditor still has every legal right to collect the remaining balance from your co-signer.
In cases where you defaulted on a loan before filing, your co-signer may have already begun making payments. While those payments reduce the principal, your bankruptcy doesn’t prevent the creditor from continuing to demand repayment from them. This can create long-term financial pressure, especially if the co-signer didn’t expect to be responsible for the full debt.
If you jointly own property with a co-signer—like a vehicle or home—secured by the debt, the discharge of your personal liability does not stop the lender from repossessing or foreclosing on the asset if payments aren’t made. The co-signer is still responsible for the full balance, and they could lose the collateral if they’re unable to keep up.
The bottom line is that while Chapter 7 offers powerful personal relief, it can leave co-signers fully exposed. That’s why it’s important to plan ahead with legal counsel that understands both the law and your financial relationships.
What You Can Do Before Filing Chapter 7
If you’re considering Chapter 7 and have one or more co-signed debts, we recommend taking the following steps:
- Make a list of all co-signed or personally guaranteed debts before filing your petition.
- Talk to your co-signers in advance. Inform them of your intent to file and explain how it may impact them.
- Explore refinancing options to remove or replace the co-signer if possible.
- Consider reaffirmation agreements only after carefully reviewing the legal and financial consequences. Reaffirming a debt means agreeing to repay it even after filing, which may help protect a co-signer but keeps you liable.
- Evaluate alternatives, such as Chapter 13 bankruptcy, which offers more flexibility and potential protection for co-signers under the automatic stay.
A Real-World Example
We often see this situation with private student loans. Suppose a parent co-signed on your student loan, and you file Chapter 7. Your legal obligation to repay that loan may be discharged, but your parent’s obligation remains intact. Once your case is closed, the creditor may immediately resume collection efforts against your parent, potentially leading to lawsuits or wage garnishment.
Without proper planning, your bankruptcy could shift the full financial burden onto someone you care about.
Co-Signers Can Be Impacted By Your Bankruptcy
Bankruptcy is a powerful tool for getting a fresh start, but it’s not without ripple effects—especially when co-signers or personal guarantors are involved. Filing Chapter 7 in Michigan may wipe out your debts, but it can leave others on the hook unless steps are taken to address the situation proactively.
At The Mitten Law Firm, we work closely with clients to not only protect their own interests but also to minimize harm to others involved in their financial lives. If you’re considering bankruptcy and want to make sure you’re doing it right—for yourself and for those who’ve supported you—schedule a consultation with our experienced legal team today.