July 15, 2020

Your Co-debtors Get Protection from Chapter 13

One of the more interesting features of Chapter 13 law is something called the “co-debtor stay.”  Set out at Section 1301(a) of the Bankruptcy Code, the co-debtor stay disallows collection action on consumer debt against co-debtors of the person filing for bankruptcy.  A typical scenario – you file Chapter 13 and include a debt to Best Buy for a new television.  Your mother co-signed the loan with you.  Your Chapter 13 protects your mother from collection efforts for as long as you remain in Chapter 13.

Now the obligation of the co-debtor does not disappear.  If you repay a consumer debt at 30 cents on the dollar in your Chapter 13, your co-signer will be liable for the remaining 70% after your case is over.   However, during the time you are in Chapter 13, your mother is protected.   Often in these cases debtors will set up special payment classses in their chapter 13 plans to pay co-signed debts in full to protect the co-debtor.   In other situations – such as when the co-signer is an ex-spouse, the co-debtor is left exposed.

The co-debtor stay only applies to consumer debt and it only applies in Chapter 13.  If you have co-signed debts, make sure to tell your lawyer so that appropriate decisions can be made.