Unfair Discrimination in Chapter 13-Part 2

28 Dec Unfair Discrimination in Chapter 13-Part 2

I previously wrote about the rule against unfair discrimination between similarly classed creditors in Chapter 13. There is an important and under-utilized exception to this rule. Section 1322(b)(1) of the Bankruptcy Code allows a debtor to treat unsecured co-debts differently than other unsecured debts. What this means is that debtors may propose plans in which they pay consumer debts that another individual cosigned for at 100 percent while paying other unsecured creditors only a portion of what they are owed. Depending on local practice, there may be controversy on whether this payment can be direct or must go through the plan. However, the bottom line is the same: if a debtor chooses, he can protect a co-signor by maintaining full payments on the debt to the detriment to other creditors. If this were not the case, the co-signor would end up on the hook for the balance of the debt not paid in the bankruptcy.

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