Bankruptcy Does Not Wipe Out Your Co-Signors Liability

Many small business owners will have a family member or close friend co-sign for them on a business loan or the purchase of a major asset, such as a house or car.  If you fall behind on the payments and decide that bankruptcy is the right option for you, be aware that filing bankruptcy will only wipe out YOUR personal liability on the debt.  If your parents or friends provided their guarantee to a creditor that they would pay the debt if you could not, they will likely receive a nasty demand letter from the creditor whose debt you discharged.  If the creditor believes that your co-signor has significant assets to recover, it may decide to sue that person, possibly forcing them into bankruptcy.
This is why I always advise people to not co-sign with friends or family members on loans.  Financial problems can cause huge rifts in otherwise harmonious family and personal relationships.  If I decide to lend a family member money, I do so with the intention that I will never see it again and treat it as a gift.
Be especially weary of who you have to co-sign for a Small Business Administration loan, as that person’s credit and financial life will be greatly affected the the success or failure of your business.