When you file a bankruptcy case, you obtain the benefit of the automatic stay. If you file a Chapter 13 bankruptcy, you are also given the “co-debtor stay.” The automatic stay prevents creditors from taking collection actions against you, while the co-debtor stay prevents collection against your family, friends or others who co-signed loans with you. The automatic stay and the co-debtor stay can remain in place while your Chapter 13 is pending.
It is important to note that the co-debtor stay does not change or eliminate your co-borrower’s liability to pay the loan. Their financial obligations remain intact, but the creditor cannot use collection efforts against him or her while your Chapter 13 case is active (without court approval). Additionally, a Chapter 7 case does not provide you with the co-debtor stay.
As with most general rules, there are some exceptions to the application of the co-debtor stay. If a debt was incurred in the “ordinary course of business” by the debtor, the stay does not prevent collection efforts against the co-debtor.
Pursuant to 11 U.S.C. §1301, the co-debtor stay applies if (i) the primary debtor files a Chapter 13 case, (ii) the debt is a consumer debt (not a business debt), (iii) the co-borrower is an individual, (iv) the co-borrower did not become liable on the debt in the ordinary course of business, and (v) the Chapter 13 case was not dismissed, closed or converted to a Chapter 7 or Chapter 11 case.
If the above criteria are met, the co-debtor stay can be effective for the full term of the Chapter 13 plan (which is three to five years).
If you are interested in learning more about filing a Chapter 13 bankruptcy or the co-debtor stay, contact one of our seasoned bankruptcy attorneys to schedule your appointment.