The co-debtor stay applies in chapter 13 of the United States Bankruptcy Code and goes into effect immediately upon the filing of the case. The co-debtor stay will prohibit any action or continued action to collect on a consumer debt from an individual who secured such debt or who is liable on such debt with the debtor with the exception being if the co-debtor became liable on such debt in the ordinary course of business.
The co-debtor stay will apply provided the following legal requirements are met:
1) The primary debtor must have filed the petition for relief under chapter 13.
2) The debt involved must be a consumer debt which is a debt incurred by an individual primarily for personal, family or household purposes.
3) The co-debtor must be an individual.
4) The co-debtor must not have become liable on such debt in the ordinary course of business.
5) The chapter 13 case must be an open case. It must not be closed, dismissed or converted to a case under chapter 7.
One interesting point with regard to the co-debtor stay is that it generally will not apply to a tax debt. This is true even if the debtor is proposing to pay back 100% to the taxing authority. This happened in a recent case where a debtor was agreeing to pay back the full amount to the IRS through a chapter 13 bankruptcy filing. The co-debtor, who also owed jointly on that debt, did not file along with the debtor. Most practitioners and consumers would be under the false impression that the co-debtor stay applied in that case since the IRS was being paid back 100% by the filer. The truth is that most courts have held that tax debts are not consumer debts and thus the co-debtor state does not apply.
Seeking Relief From The Co-Debtor Stay.
Section 1301(c) lists three separate grounds by which relief may be sought from the co-debtor stay. These are as follows: The co-debtor received the consideration for the claim held by the creditor; the debtor’s plan does not propose to pay the claim; and the creditor’s interest would be irreparably harmed by the continuation of the co-debtor stay. The moving party simply needs to show that it is entitled to relief under any of the subsections of 1301(c). The most common form is that the plan does not propose to pay the claim in full. By not providing full payment on the co-signed debt, the creditor can petition the court and be granted approval to pursue the co-debtor separately.
Although the co-debtor stay does not come up very often in a chapter 13 bankruptcy case, it is important to understand the nuances of this section. The important take away for my readers is that the co-debtor stay only applies to a consumer debt and that the stay may be modified if the creditor is not being paid back 100% through the plan.
