The Chapter 13 Bankruptcy Co-Debtor Stay also works in Chapter 12 and some 11 cases. You might have to file bankruptcy but, you also want to protect your co-signers. When you file a bankruptcy, normally an automatic stay for co-debtors goes into effect under 11 USC 1301 (C). The automatic stay keeps creditors from collecting from the debtor or their property. The only exception to the automatic stay is when people repeatedly file Chapter 13 cases.
The Chapter 13 Co-Debtor Stay
In Chapter 13, 12 under 11 USC 1201 and individual Chapter 11 cases, this stay is to protect the co-signer. However, to be clear, the co-signer stay only protects a person, not a business. The strongest co-debtor stay protection is when you pay a debt in full pursuant to a domestic support order. The co-signer is protected if the following is true:
- The Debtor must receive the benefit of the debt – 1301(c) 1.
- The plan must repay 100% of the debt – 1301 (c) 2.
However, the co-signer is not protected if the following is true:
- The Creditor proves they will suffer irreparable harm by not collecting from the co-signer stay – 1301 (c) 3.
Again, on a motion by the Debtor, the court will impose a Co-Debtor Stay. The following are some of the considerations for the Co-Debtor Stay:
- The Chapter 13 plan is likely to be successful.
- There is little or no harm to the creditor.
- The co-debtor stay prevents indirect collections from the Debtor.
- The co-debtor stay terminates when the plan converts close or is dismissed.
- It also automatically terminates 20 days after filing a motion for the termination of the stay if there is no objection.
- 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 Chapter 13. If the debt in any part remains unpaid at the end of the plan, then a creditor can proceed against the cosigner. However, this raises an interesting question. What if the creditor files a claim for $6,500 dollars and the $6,500 dollars is repaid in full but the interest and penalties are not paid in full in accord with the contract? With that, here are our local Chapter 13 issues you might need to know.
- Chapter 13 plans can reduce an interest rate and often, 21% of 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 that often happen but never get the same answer from 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 discharges.
Co-Debtor Stays are only for Chapter 11, 12, and 13 consumer debts
Essentially the stay covers the property of the estate, the Debtor, and the Co-Debtor for consumer property and consumer debts. However, 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.
Therefore, 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 statute 11 U.S.C. 1301.
For instance, the Co-Debtor stay protects your co-signer if you buy a recreational fishing boat. However, 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 receive protection. However, corporations cannot file a Chapter 13 or get the co-debtor protection.
Chapter 13 Co-Debtor Stays are only for the property of the Debtor that is necessary for reorganization.
Although you may want to protect a Co-Signer, if the property belongs to the Co-Signer then there is no Co-Debtor stay. Instead, the debt isn’t for your property, it is for their property. The property must benefit or be necessary for 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. Then, if they want to keep the property they have to file a Chapter 13 and repay it.
Also, to keep the property in 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. However, 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 or need to hire an attorney give us a call at 502-625-0905. Our Bankruptcy court regions are Kentucky eastern and Kentucky Western Bankruptcy Division and Southern Indiana.