What is the “Co-Debtor” Stay in Bankruptcy?

Attorney Ed WoodsIn 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.

 

Related Articles

 

 

 

Share This Page

Bond & Botes Law Offices

At Bond & Botes, we now offer full service bankruptcy consultation and filing over the phone or by video from the comfort and safety of your home or office. Please call 1-877-581-3396 or click here to setup your free phone or video consultation.

The lawyers at the Bond & Botes affiliated offices serve clients at offices in Anniston, Birmingham, Mobile, Montgomery, Opelika, Decatur, Huntsville, Florence, Haleyville and Gadsden, Alabama; Vicksburg, Hattiesburg and Jackson, Mississippi. Read our disclaimer here. You can view our Privacy Policy here.

Alabama Offices

Birmingham

2107 5th Avenue North
Age-Herald Building
Birmingham, Alabama 35203
Phone: (205) 802-2200


Shelby County Location
15 Southlake Lane, Ste 140
Birmingham, AL 35244
Phone: (205) 802-2200


Florence Location
121 S. Court Street
Florence, AL 35630
Phone: (256) 760-1010


Huntsville Location
225 Pratt Avenue NE
Huntsville, AL 35801
Phone: (256) 539-9899


Montgomery Location
311 Catoma Street
Montgomery, AL 36104
Phone: (334) 264-3363


Decatur Location
605 Bank Street
Decatur, AL 35601
Phone: (256) 355-2447


Haleyville Location
914 19th St.
Haleyville, AL 35565
Phone: (205) 486-3580


Gadsden Location
430-B Chestnut Street
Gadsden, AL 35901
Phone: (256) 485-0195


Opelika Location
216 South 8th Street
Opelika 36801
Phone: (334) 887-7666


Anniston Location
1302 Noble St #2C
Anniston, AL 36201
Phone: (256) 344-3559


Cullman Location
200 Second Avenue SW
Cullman, AL 35055
Phone: (256) 739-9866


Mississippi Offices

Jackson Location
5760 I-55 North, Ste 100
Jackson, MS 39211
Phone: (601) 353-5000


Hattiesburg Location
607 Corinne St, Ste B8
Hattiesburg, MS 39401
Phone: (601) 264-7200


Vicksburg Location
1212 Farmer Street
Vicksburg, MS 39180
Phone: (601) 353-5000

© 2024 by Bond & Botes Law Offices. All rights reserved. Disclaimer | Privacy Policy