Good Reason to File Bankruptcy Now: To Immediately and Permanently Protect Your Co-Signer through Chapter 13
Chapter 7 doesn’t stop a co-signed creditor from chasing your co-signer. Chapter 13 does. Now and forever.
The Limited Way Chapter 7 Can Help Your Co-Signer
The last blog post discussed the narrow circumstances in which Chapter 7 “straight bankruptcy” could protect a co-signer on one of your debts. It could do so if, by discharging (legally writing off) all or most of your other debts, you would then be able to catch up on (if necessary) and keep current on your co-signed debt. If that’s your situation, Chapter 7 may protect your co-signer.
The problem is sometimes, even if you were current on the payments, the creditor would have the contractual right to contact your co-signer to demand payment in full, and sue your co-signer if he or she did not pay it off. And if the creditor has that right, there is nothing in Chapter 7 that would prevent it from asserting that right.
What Chapter 13 “Adjustment of Debts” Can Do
So in a Chapter 7 case a creditor can contact and pursue your co-signer at any time—even during your case—but under Chapter 13 it can’t do any of that. From the moment your Chapter 13 case is filed, the creditor can’t contact or sue your co-signer, or take any other collection action against him or her, and must stop any lawsuit or any other action that is in process.
This prohibition doesn’t just apply to the beginning of your case, but is effective throughout the 3-to-5-year Chapter 13 case. However, the creditor could formally ask for and receive permission from the bankruptcy court to pursue the co-signer. The court will not give such permission as long as you have arranged to pay the co-signed debt during the course of your case.
Finally, the creditor could pursue your co-signer after the Chapter 13 case was completed, but not if you pay that debt in full during the course of the case. Paying that debt in full is made much easier because in most jurisdictions you are usually allowed to favor that creditor over many of your other creditors, with the effect that you often can pay that co-signed debt in full while paying little or nothing to most other creditors.
Exceptions to the Co-Debtor Stay
The co-debtor stay only applies to “consumer debt of the debtor.” Consumer debt “means debt incurred by an individual primarily for a personal, family, or household purpose. It does not apply to business debts. Note that it also does not apply to tax obligations jointly owed by spouses or business associates.
Similarly, a co-signer is not protected under Chapter 13 if he or she “became liable on or secured [the] debt in the ordinary course of business.” In other words, even with a consumer debt, if the co-signer has a business purpose in co-signing the debt or in providing collateral on the debt, the co-debtor stay does not protect this co-signer.
Finally, if the co-signer “received the consideration for the claim held by [the] creditor,” and the creditor points this out to the bankruptcy court, the court will allow the creditor to pursue the co-signer. In other words, the co-debtor stay is designed to protect co-signers who helped the debtor get credit benefitting the debtor, not to help the co-signer who was helped by the debtor to get credit benefitting the co-signer. The co-signer who received the money being borrowed or the item(s) being purchased on credit is not protected.
So, the co-debtor stay only helps co-signers on consumer debts, in which the co-signer did not co-sign for some business purpose, and in which the debtor and not the co-signer got the benefit of the credit provided by the creditor.