In most instances, when a person (referred to as the “debtor”) files a bankruptcy case, there immediately arises an “automatic” stay protecting that debtor against almost all types of debt collection activity. For example, the “automatic” stay protects the debtor’s car from being repossessed. It also protects the debtor’s residence from a foreclosure sale. This situation works neatly where there is only one person responsible for the payment of a debt and that person becomes a debtor in a bankruptcy case. But, the “automatic” stay protects only those who file a bankruptcy case. What happens when there is more than one person responsible for the payment of a debt but only one of those persons files a bankruptcy case? It’s the “co-debtor” stay to the rescue!
How Co-Debtor Stay Works
To better understand how the “co-debtor” stay works, consider a case where a husband and wife buy a new car for the household. At the dealership, they’re happy and under the influence of new car smell. The finance and insurance manager tells them that they both need to sign the car loan papers so they do. They drive away smiling in their new shiny car. They’re also now both responsible for paying the car note. They are both fully responsible for payment of the entire loan balance. Later, when financial problems arise, assume the husband files a Chapter 13 bankruptcy case. The wife decides not to join the husband in filing the bankruptcy case. Now we have a situation where one of the persons responsible for paying the loan, i.e., the husband, has filed a bankruptcy case and is protected by the “automatic” stay from the debt collection efforts of the car creditor. But what about the wife? The wife didn’t file a bankruptcy case along with the husband, so there is no “automatic” stay to protect the wife from the debt collection efforts of the car creditor. So, can’t the car creditor simply sue the wife for the loan balance? In this example, the answer is no. The reason is that two “stays” arise from the husband’s Chapter 13 filing. The first is the “automatic” stay protecting the husband. The second is the “co-debtor” stay protecting the wife.
Even though the preceding example involves a husband and wife, the protection of the “co-debtor” stay is not limited to spouses. The “co-debtor” stay will protect any person who is jointly responsible for a debt. So, for example, it would apply where a parent co-signs a loan for a child or a friend co-signs a loan to help a friend get that loan.
Co-Debtor Stay Limitations
There are some limitations on the “co-debtor” stay. Perhaps the most significant limitation is that the “co-debtor” stay is not available at all in Chapter 7 cases. Since most individual consumers file a bankruptcy case under either Chapter 7 or Chapter 13, a Chapter 13 filing is necessary to obtain the protection of the “co-debtor” stay. Another limitation is that the “co-debtor” stay applies only to “consumer debts.” The Bankruptcy Code defines “consumer debt” as a debt incurred by an individual primarily for a personal, family, or household purpose. So, if the debtor and co-debtor are both responsible for a debt that was NOT incurred by an individual primarily for personal, family, or household purposes, the “co-debtor” stay does not apply to that debt. Finally, there are some circumstances where the bankruptcy court could issue a ruling that removes the protection of the “co-debtor” stay in a particular case.
In the final analysis, in any situation where two or more people are responsible for the payment of a debt and only one of those persons files a bankruptcy case, the other person(s) may ultimately have to pay the debt. This is a risk inherent in obligating oneself to pay a debt. But when it applies, the “co-debtor” stay can be a powerful tool to help one debtor get the relief he or she needs without dragging the other person into the debtor’s bankruptcy case or forcing the other person into their own bankruptcy case.
If you are facing a situation where someone other than yourself is indebted on a debt with you and you are in a financial crisis, you should promptly seek competent advice. Filing a Chapter 13 bankruptcy may give you the relief you need while protecting the other person from unexpected and untimely debt collection activity. Our attorneys are available to consult with you in a free, private and personal consultation to explore all of your options with you. We’re happy to answer all of your questions about the “co-debtor” stay and how formal debt relief can work for you. When you are ready for help, please call the office nearest to you for an appointment. We’ll be there to answer your questions and help you get the relief you deserve.
- Disclosing a Spouses Income in Bankruptcy
- Are Co Debtors Protected in Bankruptcy?
- Motions for Relief from the Automatic Stay in Chapter 13