Chapter 13 “adjustment of debts” goes a big step further than a Chapter 7 case by protecting your co-signers and their assets.
The Regular “Automatic Stay”
The automatic stay—your protection against just about all collection efforts by your creditors—kicks in just as soon as your bankruptcy case is filed. It applies to all bankruptcy cases, including those filed under Chapter 7 and Chapter 13. It is one of the most powerful and important benefits of filing a bankruptcy case.
But it protects only you—the person or persons filing bankruptcy—and your assets. It does not protect anybody else who may also be legally liable on one of your debts.
The Very Special “Co-Debtor Stay”
The very first section of Chapter 13—Section 1301—also deals with the automatic stay, but adds another layer of protection—applicable to your “co-debtors, or co-signers—that only applies to cases filed under Chapter 13.
Section 1301 states that once a Chapter 13 case is filed, “a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any other individual that is liable on such debt with the debtor.” (Emphasis added.)
A creditor on a consumer debt is already prevented by the regular automatic stay from doing anything to collect a debt directly from the debtor. Now, under Chapter 13 only, and only on consumer debts, that creditor is also prevented from collecting on the same debt from anybody else who has co-signed or is otherwise also obligated to pay that debt.
A Very Special Protection
If you think about it, that’s rather powerful, and quite unusual. The person being protected—your co-signer—has nothing to do with your bankruptcy case filing. The co-debtor stay gives you the power to protect that person—likely somebody you really care about—who is not filing bankruptcy and so is not under the direct jurisdiction of the court. The person may not even know that you are protecting them from the creditor.
Conditions and Limits of the Co-Debtor Stay
Besides being limited to consumer (not business) debts, the “co-debtor” protection:
1. Does not protect spouses from joint liability on income taxes. That’s because income tax debts are not considered “consumer debts” for this purpose.
2. This protection does not extend to those who “became liable on… such debt in the ordinary course of such individual’s business.”
3. Creditors can ask for and get permission to pursue your co-debtor to the extent that:
(a) the co-debtor had received the benefit of the loan or whatever “consideration” was provided by the creditor (instead of the person filing the bankruptcy)—in effect that you were co-signing for him or her; or
(b) the Chapter 13 plan “proposes not to pay such claim.”
4. Even if a creditor does not seek or get the above permission, this co-debtor stay expires as soon as the Chapter 13 case is completed, or if it’s dismissed (for failure to make the plan payments, for example), or converted into a Chapter 7 case.
Choosing between Chapter 7 and 13 often involves weighing a series of considerations. If you want to protect a co-signer or someone liable on a debt with you from being pursued for that debt, seriously consider Chapter 13 because of the co-debtor stay.