Chapter 13 protects your co-signer better through the special co-debtor stay. It has its own limits but provides the strongest protection.
Two weeks ago we discussed how to protect yourself from both your co-signer AND the creditor owed the co-signed debt.
Then last week was about protecting your co-signer in the limited ways that Chapter 7 can. It assumed that protecting your co-signer was a very high priority for you. You are willing to pay the co-signed debt once you discharged (wrote off) all your other debts.
The Limitations of Chapter 7
But as we just said Chapter 7 “straight bankruptcy” helps in only limited ways. Here are situations where it can’t help. If:
- even after bankruptcy, you can’t afford to pay the co-signed creditor’s monthly payment
- whether or not you can afford those payments, you’ve fallen behind and don’t have the money to catch up
- the co-signed creditor has “accelerated” the debt—declared it to be all due at once, which you can’t pay all at once
- the creditor has sued your co-signer, and already has or will soon have a judgment against him or her
In all these scenarios nothing stops the creditor from pursuing your co-signer.
Chapter 7 Protects You but Not Your Co-Signer
As soon as you and your bankruptcy lawyer file a Chapter 7 case, the creditor could no longer chase you. You’d be protected by the “automatic stay” against virtually all creditor collection actions. (See Section 362 of the U.S. Bankruptcy Code.) And after your case would be completed a few months later that debt would be forever discharged. The creditor would have no further recourse against you. (See Section 727(b) of the Bankruptcy Code.)
Because of this the creditor would pursue your co-signer instead. The creditor may not even be willing to talk with you or accept your payments because it thinks it’s legally not supposed to.
The Special Chapter 13 Co-Debtor Stay Solution
If you instead file a Chapter 13 “adjustment of debts” case you can usually protect your co-signer from the creditor. This protection is enabled by the “co-debtor stay,” which is available only under Chapter 13.
The co-debtor stay specifically protects your co-signer—“any individual that is liable on [a consumer] debt with the debtor.” The “creditor may not act, or commence or continue any civil action [that is, lawsuit], to collect all or any part of a consumer debt of the debtor.” (See Section 1301 of the Bankruptcy Code.)
So the co-debtor stay stops an attempt by the creditor to collect the debt through the co-signer.
Limits to the Co-Debtor Stay
This may not be quite as good as it sounds right off.
First, the creditor can get around the co-debtor stay simply by filing a motion in the bankruptcy court saying that your Chapter 13 payment plan is not proposing to pay the debt in full. (Section 1301(c)(2).)
One way to prevent this is for your lawyer to structure your payment plan to pay that debt in full. If your original plan did not do this, amend your plan to pay that debt in full after the creditor’s motion. Bankruptcy judges in most parts of the country will allow you to favor your co-signed debt in this way.
Second, there’s a problem even if a creditor takes no action when you’re not paying the co-signed debt in full. The co-debtor stay expires when your Chapter 13 case is completed. To whatever extent you didn’t pay off the debt by that time, the creditor can then pursue your co-signer. This includes any accumulated interest, late fees, etc.
The only way to prevent this is to make sure that you pay the co-signed debt in full during your Chapter 13 case. You’ll usually have up to 5 years of protected time to do so.
Third, the creditor can pursue your co-debtor if the debt benefitted the co-debtor instead of you. After asking permission from the court the creditor can pursue the co-signer if it “received the consideration” for the debt. (See Section 1301(c)(1).) That is, you can’t protect a co-signer if YOU actually co-signed the debt tor the CO-SIGNER’S benefit.
Exceptions to the Co-Debtor Stay
The co-debtor stay does not apply to and help with:
- non-consumer (business) debts
- income tax debts (with spouses or business co-obligors)
- debts entered into by your co-signer “in the ordinary course of [his or her] business”
Notwithstanding these conditions and exceptions, Chapter 13’s co-debtor stay can be a remarkable and effective tool for protecting your co-signer.