The Co-debtor Stay is a powerful tool available in a chapter 13 bankruptcy. The co-debtor stay prohibits creditors from pursuing a c0-signer, co-borrower, or co-debtor while the principal debtor is in a chapter 13 bankruptcy case.
The impetus behind the Co-Debtor Stay is to protect the principal debtor, who is in a chapter 13 bankruptcy. This is accomplished by extending the automatic stay, provided to the debtor in bankruptcy, to the co-debtor who is not in bankruptcy. This helps to ensure that the co-debtor does not try to influence the principal debtor, who is in bankruptcy, to pay off the debt or exit his or her bankruptcy in order to resolve the debt.
The common fact pattern follows: There is a loan with a principal signer and a co-signer. The principal signer files a chapter 13 bankruptcy. What becomes of the co-signer who did not file bankruptcy? In a chapter 13 bankruptcty, the co-signer, who did not file bankruptcy, is protected from the creditor as well, due to the co-debtor stay. During the pendancy of the chapter 13 bankruptcy, the creditor cannot pursue any legal or collection activities against the co-debtor. The co-debtor stay applies to a chapter 13 bankruptcy, not a chapter 7 bankruptcy
The co-debtor stay in a chapter 13 bankruptcy only applies to consumer debts, and does not apply to tax liability, business debt, or “bad check” debt.
The co-debtor stay lasts, generally, as long as the chapter 13 bankruptcy of the principal debtor lasts, i.e., until the case is completed, dismissed, or converted to another chapter of bankruptcy.
If a creditor knowingly violates the co-debtor stay, that creditor can be held in contempt of court, and damages can be sought, including attorney fees.
If you have any questions regarding bankruptcy, including filing bankruptcy on debts for which there may be a co-signer on, please contact our office to schedule a free consultation.