What Happens to a Co-Debtor in Your Bankruptcy?

man in suit shuffling three foam cupsAbout the Co-Debtor Stay

Many 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. It is a temporary injunction that helps protect the debtor from being pressured by creditors through friends or relatives. It is especially beneficial in situations where one spouse has filed for bankruptcy and the couple has joint debts. The co-debtor stay protects the spouse who did not file.

The Co-Debtor Stay and Filing 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 for 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.

Does Co-Debtor Stay Apply in Chapter 7 or 11?

The co-debtor stay does not exist in 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.

What Are the Limits of the Co-Debtor Stay?

The co-debtor stay does not stop the co-debtor's obligation to pay the debt. It simply stops creditors from taking any action to collect against the co-debtor while the Chapter 13 bankruptcy is pending. The stay does not apply to business joint debtors, only individual joint debtors.

Have Questions? Call LSAS Law at (954) 932-5377 for a Free Consultation

Please keep in mind that every case is different. If you have questions about filing 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) 932-5377.

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