It is possible to declare bankruptcy without negatively impacting co-debtors. The """"Co-Debtor Automatic Stay"""" is a feature of Chapter 13 bankruptcy. This potent tool was created to defend bankruptcy filers by prohibiting creditors from taking collection action against any individual obligated on a consumer debt owed by the debtor (see 11 U.S.C. 1301). A consumer debt is defined by 11 U.S.C. 101(8) as a debt """"incurred by an individual primarily for personal, family, or domestic purposes.""""
Although the stay protects the co-debtor during the bankruptcy, it does not release the co-debtor from the obligation to pay the debt. During the pendency of the case, it will prevent the creditor from taking collection actions against the co-debtor, such as obtaining a judgment, perfecting a claim, or reporting negative information to credit bureaus.
Unfortunately, there are exceptions to the co-debtor stay protection. The state does not prohibit the collection of debts incurred during normal business operations. Moreover, because tax debts are not typically deemed consumer debts, tax authorities can continue collection efforts while the bankruptcy is pending. Additionally, the co-debtor stay does not apply to Chapter 7 cases. This implies that the stay will end if the debtor converts from Chapter 13 to Chapter 7.
Lastly, the co-debtor stay may be modified by the Bankruptcy Court at the creditor's request. A creditor may file a motion with the court requesting that the stay be """"lifted"""", which would allow the creditor to commence collection action against the co-debtor. When the co-debtor is the one who actually received the benefit of the debt (e.g. you co-signed a car loan for your friend and she drives the car), if the debtor's Chapter 13 plan does not provide for payment of the debt, or if the creditor can demonstrate that its interest would be irreparably harmed by the continuation of the stay, these types of motions are generally granted.
A knowing violation of the stay is unlawful and punishable by court-imposed sanctions, and any creditor action taken in violation of the stay is null and void. Immediately report any such violation to the debtor's attorney so that the appropriate motions can be lodged with the Bankruptcy Court.
The co-debtor stay is an extremely effective tool. To learn more about the benefits of declaring bankruptcy, discuss your specific situation with an experienced bankruptcy attorney. The top bankruptcy lawyers provide complimentary consultations.""
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