The Chapter 13 Bankruptcy Co-Debtor Stay also works in 12 and some 11 cases
Sometimes you need to protect a co-signer. You may have to file a bankruptcy. But when mom and dad or your spouse co-signed for the car you need to protect them. When you file a bankruptcy normally an automatic stay for co-debtors goes into effect under 11 USC 1301 (C). The only exception to the automatic stay not going into effect is when people repeatedly file Chapter 13 cases. The automatic stay keeps creditors from collecting from the debtor or their property.
The Chapter 13 Co Debtor Stay
In Chapter 13, 12 under 11 USC 1201 and individual Chapter 11 cases this stay can even protect the co-signer. The co-signer stay only protects a person not your business. The strongest Co-Debtor stay protection is when you pay a debt in full pursuant to a domestic support order. To be protected:
- The Debtor must have gotten the benefit of the debt 1301(c) 1
- The plan must repay the debt 100% 1301 (c) 2 and
- the Creditor is harmed irreparably by the codebtor stay 1301 (c) 3
The Court can on motion by the Debtor impose a Co-Debtor Stay when three elements exist. Harm will happen to the plan if the co-debtor stay is not imposed. The Chapter 13 plan is likely to be successful, And there is little or no harm to the creditor. The co-debtor stay prevents indirectly collecting from the Debtor. The Co-Debtor stay terminates when the plan converts closes or is dismissed. It also automatically terminates 20 days after filing a motion for the termination of the stay if it is not objected to. If the debt is paid in full the obligation terminates.
Chapter 13 Co-Debtor Stay Elements
Chapter 13 Co-Debtor Stays need to repay the debt in full
To protect the Co Debtor the debt must be repaid in full during the Chapter 13. If the debt in any part remains unpaid at the end of the plan, then a creditor can proceed against the cosigner during the Chapter 13. This raises and interesting question. What if the creditor files a claim for 6500 dollars and the 6500 dollars is repaid in full but the interest and penalties are not paid in full in accord with the contract. Here are our local Chapter 13 issues you may need to know.
Chapter 13 plans can reduce an interest rate and often 21% loans are reduced to 1 or 2% over the prime rate. Does the plan have to repay the proof of claim as it is filed. If the judge issues an order of confirmation which reduces the interest rate does it still pay the debt in full? If the Creditor fails to object or appeal is the creditor bound by the order of confirmation it didn’t object? These are all interesting questions which often happen but never seem to be answered by the courts in the same way in all the Circuits. Normally unless the debt is repaid in full the debt can be collected from the co-debtor after the case is discharged.
Co Debtor Stays can only be for Chapter 11, 12 and 13 consumer debts
Essentially the stay covers the property of the estate, it covers the Debtor and it covers the Co-Debtor for consumer property and consumer debts. There is no Co-Debtor stay in Chapter 7 cases, for business debt or for businesses. Still creditors rarely pursue the business if the owner files bankruptcy.
The Co-Debtor Stay only exists in Chapter 13 where debt is being repaid. The Co-Debtor Stay also only exists if you are protecting personal, family and household goods. This definition comes directly from the statute 11 U.S.C. 1301.
Yes the Co-Debtor stay will protect your co signer if you bought a recreational fishing boat. It doesn’t protect the co-signer if you bought a commercial fishing boat. IRS debts must be repaid in full as required by 11 U.S.C. 1325. Tax debts are not consumer debts so the co-debtor stay never actually applies but the IRS normally stops all collections if this is a joint tax debt. Remember only people are protected. Corporations cannot file a Chapter 13 or get the co-debtor protection.
Chapter 13 Co Debtor Stays can only be for property of the Debtor necessary for reorganization.
Although you may want to protect a cosigner, if the property belongs to the co-signer then there is no co-debtor stay. Instead the debt wasn’t for your property it was for their property. The property must benefit or be necessary to the Debtor to qualify for stay protection. The Co-Debtor gets the stay automatically but if the property does not belong to the person who filed the bankruptcy the creditor can ask for the stay to be terminated. If they want to keep the property they have to file a Chapter 13 and repay it.
Also to keep property in a Chapter 13 it must be necessary for the Debtor. The Harley Davidson motorcycle or the fishing boat might be kept if you have a 100% plan. However, don’t expect to keep such items unless your plan repays about 70%. If you have a plan that is presumed to be filed in good faith the judge normally does not review the plan. Some judges will presume it to be filed in good faith if 50% or more is repaid other judges may require a 70% repayment.
When you and a spouse, friend or family member has cosigned the court will often want to help you by extending this codebtor stay which tends to make a plan more feasible. You can repay a co-signed debt better than you can repay other debts which may get a smaller percentage. Unless CoDebtor stays are granted and filing a Chapter 13 is made beneficial people will want to use a Chapter 7 more often. If you have questions about this and need to hire an attorney give us a call at 502-625-0905