Crucial Question: How Can I Protect a Co-Signer Better in a Chapter 13 “Adjustment of Debts” Case?
The “co-debtor” stay is a remarkable tool for protecting your co-signer from having to pay your debt.
The Limits of Chapter 7
Our last blog post was about helping your co-signer under Chapter 7. You can prevent your co-signer from having to pay the co-signed debt by filing a Chapter 7 “straight bankruptcy” to discharge (legally write off) all your debts. Once you have no other debts, or only a couple of them, that may improve your financial situation enough so that you could afford to make payments on your co-signed debt.
But what if discharging your other debts still does not leave you enough money each month to make the payments on that co-signed debt? What if you have other debts that you would continue to owe after a Chapter 7 bankruptcy—recent taxes, child support arrearage, non-support divorce debt—so that you just did not have the money to pay your co-signed debt? What if you are already in default on the payments on the co-signed debt and don’t have the money to catch up on the missed payments right away? What if the creditor says it will start or continue to pursue your co-signer in spite of you filing bankruptcy?
Chapter 7 can only do so much. Chapter 13 is so much more powerful and flexible in preventing your co-signer from having to pay the co-signed debt.
Your Intent to Pay the Co-Signed Debt
To be clear, we’re assuming that you are willing to pay the co-signed debt to protect your co-signer. If you don’t want to for whatever reason—your relationship with your co-signer has soured, or the co-signer has agreed to pay it, for example—then check out the next blog post about protecting yourself in those situations.
Chapter 13’s Power—the “Co-Debtor Stay”
When you file either a Chapter 7 or a Chapter 13 case, you are protecting yourself and your assets from virtually all the collection efforts of all of your creditors through the “automatic stay.” It stops lawsuits, garnishments of paychecks and bank accounts, foreclosures, and all the rest.
Chapter 13—and only Chapter 13—also comes with the “co-debtor stay. “ That, in a somewhat similar although more limited way, protects your co-signer and his or her assets from the collection efforts of the creditor on the co-signed debt. So when you file a Chapter 13 case, your co-signer is immediately protected from that creditor just as you are.
You Protect Your Co-Signer by Paying the Debt through Your Chapter 13 Plan
Chapter 13 gives you the opportunity to pay the co-signed debt in full during your 3-to-5-year payment plan, throughout which time your co-signer is protected.
But to whatever extent your plan does NOT show that the debt will be paid in full, the creditor can ask for permission to pursue your co-signer DURING the Chapter 13 case.
Also, to whatever extent the co-signed debt is not paid in full during the case, the creditor can pursue your co-signer AFTER the case, without asking permission.
So, you simply have to make sure that your Chapter 13 plan is put together to pay that co-signed debt in full. And then make sure you make your plan payments so that actually gets accomplished.
Be aware that this can often be easier than you think because in most parts of the country you can favor a co-signed debt in a Chapter 13 plan. That means you can arrange to pay it in full while your other unsecured creditors receive little, or maybe even nothing at all. Since you are focusing your financial resources on paying off that co-signed debt, that makes paying off the co-signed debt much easier.
And since you can pay that co-signed debt in your plan on terms consistent with your budget, while fitting it in among other necessary debt payments (like recent income taxes, back child support or mortgage payments), Chapter 13 is a very flexible way to satisfy your co-signed creditor.
Two Conditions to the Co-Debtor Stay
First, the co-debtor stay applies only to co-signed CONSUMER debts, not business debts. And, importantly, it does not apply to tax debts. The IRS and state tax agencies can keep pursuing your spouse/ex-spouse or business partner/ex-business partner if you file a Chapter 13 case and the other person does not file his or her own bankruptcy case (or does not file jointly with you, in the case of a spouse).
Second, the co-debtor stay can be successfully challenged if YOU did not receive the benefit of the debt (either the cash borrowed or the item(s) purchased), but rather your CO-SIGNER did. The co-debtor stay still goes into effect at the filing of your Chapter 13 case, but then the creditor could ask the bankruptcy court for permission to pursue the co-signer by getting “relief from the co-debtor stay.” The creditor would need to convince the bankruptcy judge that the co-signer, not you, got the benefit of the debt.
Compared to Chapter 7
As you consider your options, remember that filing a Chapter 7 “straight bankruptcy” case does absolutely NOTHING to prevent a creditor from pursuing your co-signer. The “automatic stay” would protect only you during the case, and the “discharge” at the end of the case would prevent the creditor from pursuing only you in the future. Neither protects your co-signer.
That would be true both DURING the months while your Chapter 7 case is active as well as AFTER it is completed. Your filing of a Chapter 7 case would have no effect on the creditor’s ability to chase your co-signer (assuming you were in default on your payments or on some other contractual requirement). And any time after finishing your case—including years later—the creditor could pursue your co-signer, without any prior notice.
In contrast Chapter 13:
- immediately stops the creditor’s collection efforts against your co-signer just as soon as you file your case,
- prevents such efforts for the 3 to 5 years while your case is active (as long as you meet the above conditions), and
- gives you the means to pay off that co-signed debt through your Chapter 13 plan so that there is no further debt for the creditor to chase your co-signer for once your case is finished.