A Fresh Start at Protecting Your Co-Signer Better
Feb. 17, 2016
The “co-debtor” stay, available only under Chapter 13, is a creative tool for protecting your co-signer from being forced to pay your debt.
The last blog post was about filing a Chapter 7 “straight bankruptcy” case to “discharge” (legally write off) all or most of your other debts so that you could better afford to pay your co-signed debt. Today we get into how a Chapter 13 “adjustment of debts” gives you much more time to pay a co-signed debt if Chapter 7 doesn’t free up enough money to let you do so.
And if you don’t want to pay the co-signed debt, Chapter 7 and Chapter 13 can protect you from both your co-signed creditor AND your co-signer.
But first, today: if you want to, how can you protect your co-signer even better with a Chapter 13 case?
Chapter 7 Shortcomings
The Chapter 13 procedure doesn’t just give you more time to pay a co-signed debt—up to as long as 5 years. It also protects the co-signer throughout that time from the creditor. And during that time it also protects you from both the co-signed creditor and from your co-signer.
These are all practical shortcomings under Chapter 7.
First, under Chapter 7 you may well not have enough money each month, even after discharging your other debts, to make the payments on your co-signed debt. The situation is even harder if you’re already behind on the payments and have to catch up.
Second, Chapter 7 provides no protection for your co-signer at any point during the 3-4 months that it generally lasts, and none afterwards.
And third, because of the lack of protection for your co-signer under Chapter 7, together with your desire for him or her to not be hurt by that debt, you may well feel constant pressure to take care of the debt even when doing so is very difficult.
Chapter 13’s powerful and flexible “co-debtor stay” solves all these problem.
The “Co-Debtor Stay”
When you file either a Chapter 7 or a Chapter 13 case, you are protecting yourself and your assets from virtually all the collection efforts of all of your creditors through the “automatic stay.” It stops lawsuits, garnishments of paychecks and bank accounts, foreclosures, and all the rest against you.
Chapter 13—and only Chapter 13—also gives you the “co-debtor stay. “ It protects your co-signer and his or her assets from the collection efforts of the creditor on the co-signed debt. So when you file a Chapter 13 case, your co-signer is immediately protected from that creditor, not just you.
You Protect Your Co-Signer by Paying the Debt through Your Chapter 13 Plan
Chapter 13 gives you the opportunity to pay the co-signed debt in full during your 3-to-5-year payment plan, throughout which time your co-signer is protected.
The co-signed creditor can pursue you co-signer only if your Chapter 13 payment plan does NOT show that the debt will be paid in full by the end of your case.
So, you and your attorney can protect your co-signer by just earmarking enough money in your Chapter 13 plan to eventually pay that co-signed debt in full. And then you have to actually make your plan payments so that you successfully complete your case and pay-off that co-signed debt by that time.
Being Allowed to Favor the Co-Signed Debt
Accomplishing this is often easier than you think. That’s because in most parts of the country you can favor a co-signed debt in a Chapter 13 plan over most of your other creditors. You can often arrange to pay that one debt in full while your other “general unsecured” creditors receive little, or maybe even nothing at all. Since you are focusing your financial resources on paying off that co-signed debt, paying it off often becomes much more doable.
Your Chapter 13 payment plan is structured so that the co-signed debt is paid over time usually not under the usual payment terms of that creditor. Rather you can change the payment timing and amounts to fit within your budget. As part of that flexibility, you can fit paying off the co-signed debt within any other ongoing debt obligations, such as recent income taxes, child or spousal support arrearages, and/or catch-up mortgage payments.
You can see how Chapter 13’s flexibility can solve an otherwise impossible co-signer dilemma.
Caution: Two Conditions to the Co-Debtor Stay
Careful because, first, the co-debtor stay applies only to co-signed consumer debts, not business debts. Importantly, it does not apply to income tax debts. The IRS and state tax agencies can keep pursuing your spouse/ex-spouse or business partner/ex-business partner if you file a Chapter 13 case and the other person does not file his or her own bankruptcy case (or does not file jointly with you in the case of a spouse).
Second, the co-debtor stay can be successfully challenged if YOU did not receive the benefit of the co-signed debt (either the cash borrowed or whatever was purchased), but rather your CO-SIGNER did. (In other words, you co-signed on his or her behalf not the other way around.) In this situation the co-debtor stay would still go into immediate effect at the filing of your Chapter 13 case. But then the creditor could ask the bankruptcy court for permission to pursue the co-signer by getting “relief from the co-debtor stay.” The creditor would need to convince the bankruptcy judge that the co-signer, not you, got the benefit of the debt.
As long as these two exceptions don’t apply, and you meet the conditions outlined above, the Chapter 13’s “co-debtor stay” gives you a fresh start with you co-signer by:
giving you the whole 3-to-5-year life of the payment plan to pay off the co-signed debt, within your budget and as you take care of other important obligations
immediately stopping the creditor’s collection efforts against your co-signer as soon as you file your case, and protects the co-signer throughout the Chapter 13 case
protecting you both from the creditor and from your co-signer as you fulfill your sense of obligation to your co-signer