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Can You Protect a Co-Signer or Co-borrower in a Bankruptcy?

Chapter 13-the 3-to-5-year payment plan-protects not just you and your possessions.  It can also protect your co-signers from the debts they co-signed with you.

When a bankruptcy is filed for you under Chapter 7, 11 or 13, all collection activity by all your creditors must legally stop, as long as that collection activity is against you-the person(s) filing the bankruptcy case.  The automatic stay protects you from all creditor action while you are in bankruptcy. " ("Stay" is a legal term for "stop.") It is laid out in Section 362 of the Bankruptcy Code.

But what about your co-signers are they protected from creditor action? Section 362 does nothing to prevent those creditors from pursuing your co-signers, even after your bankruptcy is filed. In fact, that's when these creditors are likely to go after your co-signers since they can no longer go after you.

But filing a bankruptcy case under Chapter 13 ALSO stops creditors from chasing anybody else who co-signed with you or owes that debt along with you for some other reason. There is a separate part of the Bankruptcy Code- Section 1301 -which only applies to cases filed under Chapter 13.  Section 1301 says that once a Chapter 13 case is filed, "a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any other individual that is liable on such debt with the debtor."

What this means is that your Chapter 13 filing does not just stop a consumer creditor from collecting on a debt directly from you, the debtor. That creditor is also stopped from collecting on that same debt from anybody else who also owes on the debt with you.

This is often called the "co-debtor stay." The co-debtor stay allows you to  protect a co-debtor or co-signer from being pursued by the creditor. That person can often be protected without him or her knowing that you are doing so.

BUT, the co-debtor protection comes with some important conditions:

1. It does not apply to business debts, only to "consumer debts." Those are defined as debts "incurred by an individual primarily for a personal, family, or household purpose")  This means that business creditors-such as on landlords on commercial leases-can continue to pursue your co-signers in spite of this "co-debtor stay." Business debts include income taxes, business loans, debts incurred as a result of an automobile accident.

2. The "co-debtor stay" also does not apply to income tax debts. Why? Because they are not considered  "consumer debts" for this purpose. This means that the other taxpayers on jointly filed tax returns continue to be directly liable regardless of your Chapter 13 filing. This applies to any business partners or other co-owners who are jointly liable with you on any tax debt.

3. The most important consideration is that creditors can ask the bankruptcy court for permission to pursue the otherwise protected co-debtor in two situations.

(a)  IF the co-debtor who is not filing bankruptcy received the benefit of the loan or whatever the creditor provided: So if your co-signer received the borrowed money or whatever was being purchased on credit-NOT you-then the creditor can get permission to chase your co-signer after all.

(b)  IF your Chapter 13 plan "proposes not to pay such claim":  You ultimately protect your co-signer ONLY if you are willing to pay the debt in full through your Chapter 13 plan. In some situations-where there is a vehicle that you are paying in full-you don't pay anything extra and you protect your co-signer or co-borrower. But in other situations, it may require that you pay a debt in full that you would otherwise only pay a portion of. But even then, how much you end up paying to your creditors overall may not change-paying more on your co-signed debt to protect your co-signer may allow you to pay less to other creditors.

4. This co-debtor stay expires as soon as your Chapter 13 case ends. That means that the protection for your co-debtor ends as soon as your case is either a) successfully completed, b) when it's dismissed (if you don't make the plan payments), or c) converted into a Chapter 7 case.  This is not a problem in situations where you have paid off the entire debt during your Chapter 13 case.  But if not, your co-signer may be hearing from the creditor as soon as you complete or leave your Chapter 13 case.  That may or may not matter to you, depending on your relationship with your co-signer when that happens.

In your situation there are likely a number of factors to weigh-often more than you expected-in deciding between Chapter 7 and 13. If one of your debts has a co-debtor, then the co-debtor stay is just one more factor.  If protecting a co-debtor or co-borrower from your creditor is important to you, than filing for Chapter 13  bankruptcy may be a better option than Chapter 7 bankruptcy.



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