The Chapter 13 codebtor stay shields a cosigner from collection on consumer debt while your case is open, but it ends at discharge or dismissal.
If you file Chapter 13 bankruptcy, the codebtor stay stops creditors from trying to collect a consumer debt from the person who cosigned it with you. The stay lasts until the court closes, dismisses, or converts your case, unless the court lifts it after a creditor challenge. Find out who qualifies and what happens to your cosigner when the case ends. (11 U.S.C. § 1301.)
What Is the Chapter 13 Codebtor Stay?
The codebtor stay is a court order that protects your cosigner from collection actions on a consumer debt while your Chapter 13 case is open. The person who files for bankruptcy is the debtor. Anyone who cosigns a loan with the debtor is the cosigner, or codebtor.
When you file, an automatic stay takes effect, preventing most creditors from taking action to collect their debts. When just one person has signed on a loan, the automatic stay applies only to that debtor and the debtor’s property. But when the debtor has a cosigner, filing Chapter 13 also protects the cosigner from collection actions by the creditor. The codebtor stay continues until the case is closed, dismissed, or converted to Chapter 7 or Chapter 11, or the court lifts it at the creditor’s request. (11 U.S.C. § 1301.)
Who and What Qualifies for the Codebtor Stay?
To qualify, the debt must be a consumer debt, which is one incurred primarily for personal or family purposes, not a business debt. The stay also protects an individual who secured the debt, for example by pledging collateral. A business entity isn't entitled to the stay (and businesses, except sole proprietors, can't file for Chapter 13).
Example 1. Joe wants to take out a business loan, but his credit score is too low, so his mother cosigns. Six months later, Joe files Chapter 13 bankruptcy. The codebtor stay doesn't apply because the debt isn't consumer debt. The lender can collect the debt from Joe's mother even though Joe is in bankruptcy.
Example 2. Amanda's father cosigned her first credit card. She used it to buy food, gas, clothing, and school books. She filed Chapter 13 bankruptcy. The codebtor stay applies to Amanda's father because the debt is consumer debt, not a business debt, and her father is an individual. (11 U.S.C. § 1301.)
Can the Creditor Challenge the Chapter 13 Codebtor Stay?
A creditor can ask the court to lift the codebtor stay, but only for certain reasons. The creditor files a motion, and the debtor and codebtor can respond. If nobody objects within 20 days, the stay is lifted. The creditor might successfully lift the codebtor stay if:
- the cosigner received the consideration for the debt instead of the debtor,
- the Chapter 13 bankruptcy repayment plan doesn't provide for repayment of the debt (the stay can be lifted to the extent the plan doesn't pay it), or
- the creditor's interests would be harmed beyond repair if the stay were kept in place.
Example 1. Dan takes out a car loan, and his brother Ken cosigns. Ken drives the car, not Dan. The lender can file a motion to lift the codebtor stay to collect against Ken, because he received the property the loan was used to purchase.
Example 2. As in the previous scenario, Dan takes out a car loan, and his brother Ken cosigns. Later, Dan files Chapter 13 bankruptcy. Dan's Chapter 13 plan does not propose to repay the car loan. The creditor can ask the court to lift the codebtor stay.
Example 3. Again, Dan takes out a car loan and his brother Ken cosigns on the loan. Dan files Chapter 13, but six months into his plan, he stops making his payments, and the creditor is not getting paid. The car is rapidly depreciating in value. The creditor can file a motion to lift the codebtor stay to protect its interest in the car. (11 U.S.C. § 1301.)
What Happens to the Cosigner After Discharge or Dismissal?
When the Chapter 13 case ends, the codebtor stay also ends without providing the codebtor with the benefit of the discharge. A debtor who obtains a discharge is no longer responsible for the discharged debt, but any remaining balance isn't discharged as to the cosigner. If a balance remains, the creditor can collect it from the cosigner. If the plan pays the debt in full and is successfully completed, leaving no balance, the cosigner owes nothing more. (11 U.S.C. § 1328.)
If the case is dismissed without completing the Chapter 13 plan, the court lifts the stay for both the debtor and codebtor and the creditor is free to seek payment from either the debtor, the cosigner, or both.
Example 1. Tom completed a Chapter 13 bankruptcy and received a discharge; however, he could not discharge his student loan because he could not prove hardship. After the bankruptcy closed, Tom and his father Frank are each responsible for the remaining balance of the student loan.
Example 2. Jane filed Chapter 13 bankruptcy and was paying for her car through the plan. Her friend Donna is a cosigner on the loan. Jane is protected by the automatic stay, and Donna is protected by the codebtor stay. After paying into her plan for two years, Jane decides she no longer wants to be in a Chapter 13 and voluntarily dismisses her case, losing the benefit of the automatic stay. Once the case is dismissed, the codebtor stay is lifted, and both Jane and Donna are responsible for the remaining balance of the car loan.
Why the Codebtor Stay Favors Chapter 13
Chapter 13 gives your cosigner protection that Chapter 7 doesn't, because Chapter 7 has no codebtor stay. If you qualify for Chapter 7, you'll want to learn about what happens to codebtors in Chapter 7. You might choose to file Chapter 13 just for the benefit of the codebtor stay.
|
Key Factor |
Chapter 7 Bankruptcy |
Chapter 13 Bankruptcy |
|
Codebtor Stay |
No. Creditors can pursue your cosigner right away. |
Yes, for qualifying consumer debts, until the case is closed, dismissed, or converted. |
|
Cosigned Debt Repayment |
The debt is discharged for you, but the cosigner stays liable. |
You can pay the debt through your plan, which can release the cosigner to the extent it’s paid. |
|
Cosigner Liability After Discharge |
The cosigner remains liable for the full balance. |
The cosigner remains liable for any balance the plan doesn’t pay. |
Unfortunately, Chapter 13 isn't always an option. For instance, it might not be available if you recently had a bankruptcy case dismissed, your debt exceeds the Chapter 13 debt limits, you have no regular income, or you can't afford the payments to fund a plan. (11 U.S.C. § 109(e).)
Next Steps for Debtors and Cosigners
If you have a cosigner, talk to a qualified bankruptcy attorney before you file. An attorney can help you decide whether Chapter 13 is feasible and whether the codebtor stay applies to your debt. You might also be interested in learning about the following:
