The "Co-Debtor Stay," also known as the "Co-Debtor Automatic
Stay," is a feature of a
Chapter 13 Bankruptcy designed to protect a debtor by insulating him from indirect pressures
from his creditors exerted through friends or relatives. The Co-Debtor
Stay stops all collection actions against any individual who is obligated
on a consumer debt owed by the debtor. The Co-Debtor Stay continues until
the Chapter 13 case has concluded.
The Co-Debtor Stay is not a direct protection intended for the co-debtor.
The debtor's Chapter 13 Bankruptcy will not discharge the co-debtor's
responsibilities to the creditor. It will, however, prevent collection
action by the creditor against the co-debtor (e.g. lien perfection or
even adverse notation on the co-debtor's credit report) during the
pendency of the Chapter 13 case.
The Co-Debtor Stay does not prohibit collection on a debt incurred in the
ordinary course of business by the debtor. Additionally, tax debt is generally
not considered a consumer debt. It is important to note that the Co-Debtor
Stay does not apply at all to Chapter 7 Bankruptcy cases.
The Co-Debtor Stay is effective immediately upon the filing of the debtor's
Chapter 13 petition and continues until the case is closed, dismissed,
or converted to
Chapter 7 or 11. The Bankruptcy Court can also modify or terminate the Co-Debtor
Stay upon the motion of a creditor. The creditor may be successful in
this type of motion if the codebtor received "consideration"
for the debt (e.g. you cosigned a car loan for your brother, who actually
owns the car), if the debtor's Chapter 13 plan proposes to not pay
the debt, or if the creditor's interests would be irreparably harmed
by continuation of the Co-Debtor Stay.
A knowing violation of the Co-Debtor Stay is contempt of court and punishable
by damages, including attorney's fees. Any collection action taken
by a creditor in violation of the co-debtor stay is void.
The Co-Debtor Stay is a powerful tool to prevent collection action in Chapter
13 Bankruptcy. If you are contemplating a
bankruptcy filing and have co-debtors, consult with an experienced Palm Beach bankruptcy attorney.