How Do Michigan Courts Handle Joint Debts in Bankruptcy?

Joint debts often create significant complications during bankruptcy proceedings in Michigan. When more than one individual is responsible for a debt, such as a co-signed loan or a shared credit card, the impact of bankruptcy extends beyond the person filing. It can affect co-signers, spouses, and anyone else named on the account. 

Understanding how Michigan courts approach these types of obligations is essential for individuals planning to file for bankruptcy and anyone who has co-signed a loan but is not personally filing. Although federal law governs bankruptcy, state law and case-specific interpretations also influence the outcome in any joint debt scenario.

Joint Debts in Chapter 7 vs. Chapter 13 Bankruptcy

When one individual files under Chapter 7, the goal is to discharge or eliminate eligible debts. If a particular debt is jointly held, the filer’s responsibility may be discharged, but that does not always release other liable parties. Creditors can turn to the co-signer or joint account holder for repayment if the filer no longer has any legal obligation. This outcome often leaves the co-signer fully responsible for the outstanding balance despite not being the primary user or original beneficiary of the debt. In practice, Michigan courts uphold these principles, meaning that if a co-signer remains outside of bankruptcy, the creditor can legally pursue them for the amount owed.

Chapter 13 differs in that it involves a repayment plan that lasts three to five years. A filer may propose paying back all or part of the joint debt through this plan, which can protect the co-signer from creditors’ actions while the plan is active. As long as the filer meets the repayment obligations set forth by the bankruptcy court, creditors generally cannot demand payments directly from the co-signer. If the plan is completed, the debtor emerges with a discharge of remaining eligible debts. Still, the co-signer’s liability will depend on whether the debt was satisfied in full. Michigan courts typically allow co-debtors a degree of protection during Chapter 13 to prevent undue hardship, but each case is shaped by the specific repayment terms negotiated between the filer, creditors, and the bankruptcy trustee.

The Effect of Bankruptcy on Co-Signers

Co-signers in Michigan face particular risks when the primary borrower files for bankruptcy. Under MCL § 440.3605, a co-signer may still be liable for the full amount of a debt if the principal signer defaults or discharges the debt in bankruptcy. Many people co-sign loans to help a friend or family member secure financing, not fully realizing they could be held accountable for the entire balance if the other party files for bankruptcy. Once the principal borrower’s obligation is eliminated by Chapter 7, the lender can pursue the co-signer for repayment. In some circumstances, this can lead to wage garnishment, lawsuits, or even property liens, depending on the nature of the debt and the creditor’s collection tactics.

An important distinction arises if the filer is using Chapter 13. Because the debtor creates a payment plan, the co-signer might receive what is known as a co-debtor stay, which prevents direct collection attempts against them for the duration of the repayment period. However, if the plan does not pay the debt in full and the filer does not reaffirm the debt or otherwise make arrangements to satisfy it completely, the co-signer could face liability once the bankruptcy concludes. This tension underscores the importance of thorough legal advice for anyone signing a contract, which places them in a joint or secondary position.

The Automatic Stay and Its Impact on Joint Debt

Bankruptcy law includes the automatic stay, codified at the federal level under 11 USC 362. Although often mis-cited with an “MCL §” reference, it is actually a section of the U.S. Code that halts most creditor collection activities immediately after a bankruptcy petition is filed. This stay applies to collection calls, lawsuits, wage garnishments, and repossessions aimed at the debtor who files for bankruptcy. Joint accounts sometimes benefit from this automatic stay, but the extent of that protection can vary depending on the bankruptcy chapter and the nature of the joint debt.

When an individual files Chapter 7, the automatic stay typically applies only to actions against the debtor. The co-signer does not necessarily receive the same level of protection unless they also file. That means a creditor may be free to pursue the co-signer for the debt, even if they cannot pursue the filing debtor. In Chapter 13 cases, the co-debtor stay can cover joint debts, preventing creditors from targeting the co-signer while the repayment plan is active. However, if the court later modifies or lifts this protection, or if the Chapter 13 case is dismissed, creditors can resume collection efforts. Michigan courts adhere to these federally mandated rules, ensuring that creditors and co-signers each understand their rights and responsibilities during the pendency of the bankruptcy.

Strategies to Protect Co-Signers and Joint Account Holders

Concerns about harming a friend or family member’s credit sometimes motivate individuals to look for ways to protect co-signers when filing for bankruptcy. 

Various strategies can help minimize the adverse impact on joint account holders:

• Reaffirming a Debt: A debtor may choose to reaffirm a particular obligation, essentially agreeing to remain personally liable despite the bankruptcy. This commitment means the co-signer will not be solely responsible for the balance. However, reaffirmation carries a risk, as the debtor reopens themselves to potential collection actions if they cannot keep making payments. It is often advisable to reaffirm only when the filer is confident they can handle the financial burden and if retaining that specific debt is essential.
• Chapter 13 Repayment Plans: Chapter 13 can be beneficial for protecting co-signers because it includes the co-debtor stay. While the filer is paying off debts through the court-approved plan, creditors cannot harass the co-signer for payment. If the plan fully covers the joint debt, the co-signer might never face personal liability after all. However, if the plan pays only a portion or if it is not completed, the co-signer’s risk remains. Collaboration between the debtor, attorney, and co-signer is often critical to ensure no unwelcome surprises occur down the line.

When to Seek Legal Advice for Joint Debt Issues

Matters involving joint debts can grow complicated quickly, especially if a creditor begins pursuing a co-signer who was unaware of the borrower’s financial problems. 

It is generally wise to consult a bankruptcy attorney under the following conditions:

• Creditor Actions Against Co-Signers: If a creditor is threatening wage garnishment, filing a lawsuit, or sending harassing letters to a co-signer, professional legal intervention might be needed. An attorney can clarify rights, outline possible defenses, and explore strategies to mitigate liability.
• Restructuring Debts Without Damaging Credit: Some bankruptcy filers may opt for Chapter 13 instead of Chapter 7 primarily because they want to protect co-signers. An attorney can explain whether this is feasible and how a repayment plan might shield others from the negative impacts of bankruptcy. Additionally, careful planning can help reduce the total debt burden while still honoring some obligations for the sake of preserving important relationships.

Contact Sigal Law Firm for Bankruptcy Guidance

Sigal Law Firm offers comprehensive support and can help filers understand the implications of discharging or repaying shared obligations. Working closely with an attorney ensures that each step taken aligns with the long-term financial well-being of all parties involved. Making missteps can lead to unnecessary strain on personal relationships or large sums owed by an unsuspecting co-signer. If questions remain about the best way to proceed or if a creditor has already begun contacting a joint account holder, immediately seeking counsel is the best course of action.

Reach out to Sigal Law Firm by calling 248-671-6794 for a consultation.