What happens to a co-debtor when a debtor files for bankruptcy depends upon the type of case that is filed. Many clients come to my office relieved to find out that a bankruptcy stays proceedings against them, but they worry about whether there is a stay of proceedings for the co-debtor.
The client is justified in worrying about the friend or relative that helped them by co-signing for their loan.
When a Chapter 13 is filed the co-debtor, as well as the debtor, receives an automatic stay of any action to collect the debt. The reason the stay extends to the co-debtor in a 13 is that the debtor will normally be paying the debt through the Plan.
The co-debtor stay only applies to consumer debts, so if you co-sign for a business debt the stay does not apply.
The stay also ends if the Chapter 13 case is dismissed or if the case is converted to Chapter 7.
The co-debtor stay may also be lifted if one of the following things can be shown by the creditor:
- That the Chapter 13 Plan does not provide for full payment of the debt; or,
- That the creditor will suffer “irreparable harm” if the stay remains in place.
Unfortunately for the co-debtor, if a Chapter 7 bankruptcy is filed, only the debtor gets a stay of collection proceedings. The creditor is free to pursue collection against the co-signer.
Often, young people with little or no credit history and people with bad credit will ask a friend or family member to co-sign for a loan. The reason for this is that the lender wants someone with the means to pay the debt on the hook for the debt if the primary debtor doesn’t pay.
It has been my experience that parents, relatives, love ones or friends are very quick to lend their credit to someone close to them to help them, most often to buy a car. Frequently, the first time the co-signer learns that the debtor is having a problem paying the loan is when the co-signer gets a notice that the debtor has filed for bankruptcy.
As hard as it may be to tell a child, a relative or a friend no, think carefully before co-signing for anyone. You may end up being the one paying the bill or facing bankruptcy yourself.
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Last modified: October 22, 2012