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If I File for Bankruptcy, does the Automatic Stay Protect Co-Debtors?

Generally, the automatic stay provisions of the bankruptcy code at 11 U.S.C. § 362(a) apply only to the debtor filing for relief from the bankruptcy court. However, in certain circumstances, the fact that a debtor filed for Chapter 13 bankruptcy can stop collection action against co-debtors, even if the co-debtors did not file bankruptcy. The “co-debtor stay”, set out at 11 U.S.C. § 1301(a), is a section of the Bankruptcy Code that prevents collection action on consumer debts against co-debtors of the person filing for Chapter 13 bankruptcy for the duration of the bankruptcy case. The co-debtor stay operates to delay collection efforts against individuals close to the debtor who have obligated themselves on debts incurred by and for the benefit of the Chapter 13 debtor. Generally, the co-debtor stay applies with respect to any consumer debt for which another individual is also liable, and it continues until the Chapter 13 case has ended.

The obligation of the co-debtor does not disappear; the co-debtor stay only serves to postpone collection actions by the creditor. If you repay a consumer debt at 30 cents on the dollar through the Chapter 13 plan, your co-debtor will be liable for the remaining 70% after the petitioner’s debts are discharged. However, during the time you are in Chapter 13, co-debtors are protected from further collection action. A Chapter 13 plan may (but is not required to) seek to re-pay certain joint debts in full, in order to protect the joint debtor.

The co-debtor stay only applies to consumer debt and it only applies in Chapter 13. The co-debtor stay does not apply to Chapter 7 or Chapter 11 cases, and does not apply to non-consumer debts, which are usually tax debts, debts incurred with a profit-making motive, or debts relating to the dishonor of a negotiable instrument (such as a “bad check” debt). Many courts have determined, however, that Domestic Support Obligations (such as alimony and child support are regarded as consumer debts for the purposes of this chapter).

If you are considering filing a petition for relief under the Bankruptcy Code, the section you file under could have implications with respect to the co-debtors. If all (or a portion) of your debts are joint with another person, that fact could be one of many factors to consider when deciding whether to file a Chapter 7 or Chapter 13 petition.

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