What Happens to a Co-Debtor in Your Bankruptcy?

man in suit shuffling three foam cupsMany clients who file bankruptcy are concerned about how their filing will impact relatives or friends that have co-signed a loan with them. The answer depends on what type of case you file. A Chapter 13 filing provides you with the automatic stay and your co-signees on loans with a “co-debtor stay.” Similar to the automatic stay, the co-debtor stay prohibits creditors from taking any collection activity against your co-debtor during your Chapter 13 case, unless relief from the co-debtor stay is granted by the court.

Chapter 13

Pursuant to 11 U.S.C. §1301, the co-debtor stay applies if the following 5 requirements are met:

  1. The primary debtor files for Chapter 13 bankruptcy.
  2. The debt is a consumer debt (incurred for personal, family, or household use).
  3. The co-debtor is an individual.
  4. The co-debtor must not become liable on the debt in the ordinary course of business.
  5. The Chapter 13 case must not have been closed, dismissed, or converted to a Chapter 7 or Chapter 11 case.

If these factors are met, the co-debtor stay will remain effective during the term of the Chapter 13 plan. In other words, as long as the debtor is making payments to the creditor under a confirmed Chapter 13 plan, the creditor cannot also seek payment from the co-debtor. Of course, your co-debtor’s liability to pay the debt remains intact, so if your bankruptcy case is dismissed, the creditor can collect from the co-debtor.

Chapter 7 and Chapter 11

The co-debtor stay does not exist in a Chapter 7 or Chapter 11 filing.  This means that if you file a Chapter 7 or Chapter 11 case, your creditor will likely immediately look to your co-debtor for payment.

Please keep in mind that every case is different. If you have questions about filing a personal bankruptcy or how a co-debtor may be affected by your filing, and would like to schedule a no-cost consultation, please contact our office by completing the form on this website or calling us at (954) 516-2566.


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