What Is Bankruptcy Co-Debtor Stay?

by Adrian Lapas, Esq.

January 24, 2010

Once you file a bankruptcy case, the automatic stay serves to prohibit creditors from taking any action against you.  What if one of the accounts which is included in your bankruptcy is co-signed by someone else?  You, as the debtor, are protected by the automatic stay.  What about the other person?

Suppose you have a joint credit card or a co-signed car loan with a parent or an adult child?  Understandably, a potential debtor would be very concerned about filing bankruptcy if it would lead to adverse consequences against the co-debtor.  Is the creditor going to “tee up” this person?  The answer can be found in Section 1301 of the U.S. Bankruptcy Code.

If the co-signed debt is a “consumer” debt, meaning that it was incurred by an individual primarily for a personal, family or household purpose, and you filed under chapter 13 of the Bankruptcy Code, the creditor may be prohibited from taking any action to collect a co-signed debt.  The purpose of this provision is to prevent creditors from bringing indirect pressure on debtors by taking collection actions against the non-bankruptcy filing co-debtors upon the filing of a bankruptcy petition.

But limiting the effect of the co-debtor stay to “consumer” debt is a very important limitation.  Very often, people will personally guarantee loans made for business purposes.  If that is the case, the co-debtor stay would not be applicable.

Additionally, the co-debtor stay merely serves to delay the creditor from receiving the benefit of its bargain of obtaining another person to be jointly liable on the debt.  If a chapter 13 plan does not propose to pay the obligation in full, the creditor may ask the court for permission to pursue the co-debtor (called a Motion for Relief from the Co-Debtor Stay).

Finally, the co-debtor stay does not serve to protect the non-filing co-debtor from the effects of any pre-bankruptcy filing delinquencies with regards to credit reporting.  If a debt is delinquent, it may be reported to the credit reporting agencies as delinquent.

The debt may not be reported as being in bankruptcy for the non-filing obligor because that person did not file bankruptcy.  Often, creditors will report an account as being in bankruptcy for both the debtor who filed bankruptcy and for the non-filing debtor.  The account should not be reported as being in bankruptcy for the non-bankruptcy filing debtor and this situation can usually be fixed with a letter to the credit reporting agencies.

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I've been practicing bankruptcy law in North Carolina since 1993, and I am certified as a specialist in consumer bankruptcy law by the North Carolina State Bar. I have been deemed "Legal Eite" by Business North Carolina magazine and was invited to testify before a US House of Representatives committee on proposed bankruptcy legislation.

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Last modified: January 25, 2010