Using the Co-Debtor Stay of Chapter 13
If protecting your co-debtor from having to pay your debt is a high priority, Chapter 13 has a remarkable tool for doing that.
Chapter 7 Doesn’t Always Help
Our last blog post was about helping your co-signer through a Chapter 7 “straight bankruptcy” case. You discharge (legally write off) most or all your other debts. Then you may be able to afford to make payments on your co-signed debt.
But that doesn’t always work. What if:
- discharging your other debts still does not leave you enough money to make the monthly payments on the co-signed debt?
- you have other debts that you would continue to owe after a Chapter 7 bankruptcy—recent taxes, child support arrearage, non-support divorce debt, student loans—leaving you unable to pay your co-signed debt?
- you are behind on the co-signed debt and can’t afford to catch up on the missed payments right away?
- the creditor says it will start or continue to pursue your co-signer in spite of you filing bankruptcy?
Chapter 7 does not solve any of these problems. However, Chapter 13’s special co-debtor stay is a powerful and flexible tool that can cut through these problems in many situations.
Assumes You Want to Pay the Co-Signed Debt
All of this assumes that you are willing to pay the co-signed debt to protect your co-signer.
If you don’t want to for whatever reason then you don’t need the benefits of the co-debtor stay. Your relationship with your co-signer may not motivate you to pay the debt. Or your co-signer may have agreed to take care of the debt without your help. If so, then you don’t need the co-debtor stay. You can stop reading here. But check out our next blog post about protecting yourself in those situations.
The Special Chapter 13 Co-Debtor Stay
When you file either a Chapter 7 or a Chapter 13 case you get the “automatic stay.” That protects you and your assets from virtually all the collection efforts of your creditors. It stops lawsuits, garnishments of paychecks and bank accounts, foreclosures, vehicle repossessions, calls and letters from creditors, and such.
With Chapter 13 you also get the “co-debtor stay. “ This can protect your co-signer and his or her assets from the collection efforts of the creditor on the co-signed debt. It acts somewhat like the automatic stay for your co-signer although in a more limited way. So when you file a Chapter 13 case, there’s some immediate protection for your co-signer. Chapter 7 does not have a co-debtor stay.
How the Co-Debtor Stay Works
Chapter 13 gives you the opportunity to pay the co-signed debt in full during your 3-to-5-year payment plan. Its crucial advantage is that throughout this time your co-signer is protected from collection by the creditor.
Your Chapter 13 payment plan must show you’ll pay the co-signed debt in full during the course of your case.
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 general unsecured creditors receive little, or maybe nothing. Focusing your financial resources on paying off that co-signed debt makes paying off the co-signed debt much easier.
You have to have your Chapter 13 plan show the co-signed debt is being paid in full. That’s because 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, you need to make sure that you comply with your Chapter 13 plan, actually paying off the co-signed debt. 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. It can do so then without asking anybody’s 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.
Two Important Conditions
First, the co-debtor stay helps you only with co-signed CONSUMER debts, not business debts.
For this purpose tax debts are NOT considered to be consumer debts. The IRS and state tax agencies can keep pursuing your spouse/ex-spouse or business partner/ex-business partner. The co-debtor stay does not work so the other person has to file his or her own bankruptcy case. Or file jointly with you, in the case of a spouse.
Second, the creditor can challenge the co-debtor stay if YOU didn’t 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 to protect the co-signer. But then the creditor could ask the bankruptcy court for permission to pursue the co-signer. The creditor would need to convince the bankruptcy judge that the co-signer, not you, got the benefit of the debt. If so, the co-debtor stay would not apply and the creditor could chase the co-signer for the full debt.
Look to Chapter 13’s co-debtor stay if protecting your co-signer from collection is a very high priority. It protects much better than Chapter 7 can.
Chapter 13 allows you to pay that co-signed debt in your plan on terms consistent with your budget. And it does so while fitting it in among other special debts like recent income taxes, back child support, or mortgage payments. Chapter 13 is a powerful and flexible way to satisfy your co-signed creditor and protect your co-signer.