More than one person, typically a spouse, may be liable for a secured or unsecured debt to a creditor. However, in some situations, only one of the responsible parties, or spouses, may decide to file a bankruptcy case. If a debtor decides to file a Chapter 13, the automatic stay will enjoin (stop) actions to collect most debts from the debtor, and other non-filing parties, such as a spouse. In these Chapter 13 cases, this is known as the co-debtor stay.
The underlying policy of the co-debtor stay is to prevent creditors from indirectly pressuring Chapter 13 debtors attempting to reorganize. Thus, any continuing collection activities against co-debtors, usually the debtor’s spouse, family members or friends, is prohibited in Chapter 13 cases.
§ 1301 of the Bankruptcy Code provides that a creditor may not act to collect a debt unless the co-debtor became liable for the debt in the ordinary course of his or her business. § 1301 also states that a creditor may collect on a debt from a non-filing co-debtor in cases under Chapter 7 and 11.
In other words, the co-debtor stay only applies to consumer debts, which are those incurred for personal rather than business purposes. Also, the co-debtor stay does not apply to cases filed under Chapter 7 or Chapter 11 of the Bankruptcy Code. Thus, in these situations, a creditor may proceed with collection activities against a co-debtor under applicable state law.
Creditors are only barred from pursuing the co-debtor while the Chapter 13 case is active. Once the case is dismissed or converted to a 7 or 11, they may attempt to collect the debt from the co-debtor. Until any of these events occur, any attempt to collect the debt is a violation of the automatic stay potentially subjecting the creditor to sanctions under the Bankruptcy Code.
Creditors do have options in Chapter 13 cases where the co-debtor stay applies under § 1301(c) of the Bankruptcy Code. A creditor may terminate the stay under one of three circumstances. First, the co-debtor stay may be lifted if the non-filing co-debtor actually received the benefit from the transaction which created debt. Second, the stay must be lifted if the debtor’s Chapter 13 Plan does not propose to pay 100 percent of the creditor’s claim. Third and last, the stay must be lifted if the creditor would be irreparably harmed by continuation of the co-debtor stay.
The Bankruptcy Court will normally hold a hearing to determine if the stay should be lifted or modified when a creditor files a Motion for Relief from the Co-debtor Stay. However, if an application for stay relief is filed under § 1301(c)(2), alleging that the debtor’s plan or reorganization does not propose a 100 percent payment to the creditor of a co-signed debt, the stay is automatically lifted twenty (20) days after the filing of the Motion if the debtor or co-debtor fails to file a written objection.
The experienced Fort Lauderdale bankruptcy attorneys at Loan Lawyers are here to help you if your financial position necessitates the consideration of a bankruptcy case filing under Chapter 7, 11, or 13. To schedule a free consultation at any of our three conveniently located offices, contact Loan Lawyers today by calling 954-523-HELP (4357).