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Excluding loans from bankruptcy

  Ask Dr. DonBy Don Taylor, Ph.D., CFA,    

Dear Dr. Don,
Is there a form of bankruptcy that allows me to select which debts are claimed? For example, I have a loan with a co-signer that is in good status and another membership that is not behind and I do not wish to place these accounts in bankruptcy. Is there a way to claim only certain things?-- Ralph

Dear Ralph,
You're required to list all your debts in a bankruptcy petition. The bankruptcy court needs to see your complete financial picture and then it's up to the court to allocate the proceeds of the bankruptcy estate (in a Chapter 7 bankruptcy) among your creditors.

That said, you can reaffirm a debt. By doing so, that debt will continue to exist after the bankruptcy discharge eliminates your obligation to repay debts eligible for discharge. The debt reaffirmation has to be filed with the bankruptcy court. Often, a debt affirmation is not in the debtor's best interest since the debtor is re-obligating himself to pay a debt that would otherwise have been discharged.

In a Chapter 7 bankruptcy proceeding, the lender will look to the co-signer to repay the debt. In a Chapter 13 bankruptcy filing, you establish a court-approved repayment plan and the co-signer, while still obligated to repay the debt, won't be pursued because you are still making payments on the debt. From the U.S. Courts publication, Bankruptcy Basics:

Specifically, after the commencement of a Chapter 13 case, unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a "consumer debt" from any individual who is liable with the debtor.
11 U.S.C. § 1301.

Secured debts, like a mortgage or a car loan, are treated differently than unsecured debts, such as credit card debt. With secured debts, the lender has a security interest in the asset and that security interest survives the bankruptcy process. Again, from Bankruptcy Basics:

Although a debtor is relieved of personal liability for all debts that are discharged, a valid lien (i.e., a charge upon specific property to secure payment of a debt) that has not been avoided (i.e., made enforceable) in the bankruptcy case will remain after the bankruptcy case. Therefore, a secured creditor may enforce the lien to recover the property secured by the lien.

Trying to protect your co-signer is admirable and may be possible, but don't attempt it by leaving the loan out of the bankruptcy filing. Talk to a bankruptcy attorney to find out if filing for bankruptcy is the best solution to your credit problems.

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