CHAPTER 13 STAY PROTECTS CO-DEBTORS

One of the most beneficial aspects of a Chapter 13 bankruptcy is the Co-Debtor Stay (for more information about bankruptcy's Automatic Stay please refer to our prior article entitled "The Automatic Stay Explained").  This protection is designed to insulate the debtor from indirect creditor pressure through friends or relatives.  The Co-Debtor Stay prohibits collection actions against an individual who has a joint consumer obligation with the Debtor in bankruptcy (commonly as a co-signor on a loan).  The Co-Debtor Stay starts automatically when the Chapter 13 bankruptcy case is filed and continues until the case is closed, dismissed, or converted to a Chapter 7 bankruptcy or Chapter 11 bankruptcy.

The Co-Debtor Stay is intended to protect the bankruptcy Debtor, not the Co-Debtor.  The Co-Debtor Stay does not eliminate the Co-Debtor's legal obligation to pay the debt.  However, the Co-Debtor Stay prevents collection action by the creditor against the co-debtor during the pendency of the Chapter 13 case. 

There are some limitations to the Co-Debtor Stay.  The Co-Debtor Stay is only available in a Chapter 13 case, and does not apply in Chapter 7 or 11 cases.  The Co-Debtor Stay does not prohibit collection action on business debts.  Finally, a joint obligation on a tax debt is generally not considered a consumer debt.

The Co-Debtor Stay can also be modified or terminated by the bankruptcy court.  A creditor may be successful in terminating the Co-Debtor Stay if the Debtor's bankruptcy plan proposes to not pay the debt, if the creditor's interests would be irreparably harmed by continuation of the Co-Debtor Stay, or if the Co-Debtor received "consideration" for the debt (e.g. the Debtor cosigned a car loan for a relative, who actually owns the car).

If a creditor knowingly violated the Co-Debtor Stay, the bankruptcy court may find the creditor in contempt of court and impose a fine and award damages, including attorney's fees.  Any collection action taken by a creditor in violation of the Co-Debtor Stay is void.

If you have joint debts and are considering bankruptcy, call 1-877-337-2227 now to speak with an experienced attorney at Glanzer & Angres, P.C. and discover the benefits and protections of a Chapter 13 bankruptcy.  A Chapter 13 bankruptcy case can stop collection action against you and your co-debtors, and give you time to repay or eliminate your debts.