Today’s question: “Is there a form of bankruptcy that protects co-signers?”
Yes, there is. It’s Chapter 13. In addition to the automatic stay of any bankruptcy, filing a Chapter 13 also creates an automatic stay against creditors’ pursuing a co-signer who didn’t file bankruptcy. The idea is to give the debtor (the person filing) a chance to put together a Chapter 13 plan without the creditor being able to go after the co-signer. As long as the debtor is in Chapter 13 the creditor cannot make any sort of claim against the co-signer.
However, once the debtor completes his Chapter 13 and receives a discharge, if there is anything left owing on the debt the creditor can pursue the co-signer for that difference. This is important because ordinarily in a Chapter 13 the debtor can “strip down” the creditor’s claim to the value of the collateral. For example, suppose the debtor has a car loan with a co-signer and the car is worth $10,000 but the debt is $15,000. In Chapter 13 the debtor only has to pay the creditor $10,000 because that’s all the car is worth. With a co-signer the debtor can still do that but once the case is over the creditor can then go after the co-signer for the remaining $5,000. Having a co-signer usually means the debtor has to pay that debt in full in order to protect the co-signer.