Among the many benefits of filing bankruptcy is the automatic stay…

This is the provision of bankruptcy law that requires listed creditors to cease all collection attempts and other legal actions once the debtor has properly filed the papers in court. The automatic stay lasts through the entirety of the bankruptcy proceedings, staying in effect until the debt is discharged, which in a Chapter 13 bankruptcy case can take literally years. Any creditor that violates the terms of the stay can face serious legal penalties, which may include contempt of court sanctions. Obviously, the automatic stay is, for debtors, a highly advantageous feature of current bankruptcy law.
But what happens when one or more of the filer’s debts has a co-signer attached? To answer this question, let’s take a look at an aspect of Chapter 13 bankruptcy known as the co-debtor stay. 



Essentially, the co-debtor stay extends the protections of the automatic stay to cover co-signers of any debts included in the bankruptcy filing. This is certainly good news for co-signers, but, as strange as it may sound, the primary purpose of the law is to protect the original filer, not the co-debtor.  With the co-debtor stay, the bankruptcy filer need not worry about indirect coercion from creditors that may attempt to put pressure on friends and colleagues whose names are attached to the debts. Furthermore, the bankruptcy does not appear on the co-debtor’s credit report.
However, it should be noted that the co-debtor stay is subject to various restrictions:

1. The co-debtor stay is available only in Chapter 13 cases. If the Chapter 13 filing is converted to a Chapter 7 at any time during the process, the protections of the co-debtor stay become invalid.
2. The co-debtor stay is available only for consumer debts, which are defined by law as those accumulated for “personal, family, or household purposes.” Business debts are therefore ineligible. Also, tax debts are commonly excluded from the protections of the co-signer stay.
3.  The co-debtor stay does not erase the individual’s obligation to repay the debt. The co-debtor is protected for the duration of the bankruptcy proceedings, but afterward they are liable for all debts that have not been fully paid off.
4. The co-debtor stay protects only individuals, not businesses.

Bankruptcy law allows creditors to contest the co-debtor stay if they believe there is a valid reason why it should be lifted. The code lists three reasons that a creditor may invoke to request relief from a co-debtor stay:

1. The bankruptcy filer is not the person who “received the consideration for the claim.” For example, if the co-signer is the person who was granted a loan, then they are not eligible for the benefits of a co-debtor stay deriving from the other person’s bankruptcy filing.
2. The proposed Chapter 13 repayment plan will not entirely resolve the creditor’s debt. The creditor may ask to lift the co-debtor stay if they will be getting less than 100% of the debt owed to them..
3. The creditor’s interests will be “irreparably harmed” by the stay.

The Chapter 13 co-debtor stay is an invaluable tool, but, as you can see, it is not a straightforward matter to secure one. A seasoned attorney will significantly increase your chances of coming out of bankruptcy court victorious. Contact the law office of Long Island Chapter 13 lawyer Ronald D. Weiss today—we have decades of relevant experience in providing legal help to individuals throughout Suffolk and Nassau counties.