As in Chapter 7, creditors’ collection actions are stayed in Chapter 13 against the debtor, the debtor’s property, or property of the estate during the duration of the bankruptcy case. See Automatic Stay. In Chapter 13, however, the automatic stay protection also extends to a non-filing co-debtor during the Chapter 13 case.
The co-debtor stay only protects and individual co-debtor who is liable with the debtor on a consumer debt. Consumer debts are debts incurred for personal, family, or household purposes (e.g., credit card debt incurred for personal expenses rather than business, home mortgage, home equity loans to pay for personal expenses or home improvements, car loans for personal vehicles, child support, etc.). Non-consumer debts include business debts, personal and business taxes, mortgage for rental properties, car accident damages, etc.
The co-debtor stay may be terminated by the creditor if:
- the co-debtor actually received the consideration for the debt, i.e., the co-debtor is really the beneficiary of the debt, whereas the bankruptcy debtor is only a guarantor of the debt;
- the debtor does not propose to pay 100% of the creditor’s claim through the Chapter 13 plan (the stay may be lifted to the extent the creditor will not be paid through the plan);
- the creditor’s interest would be irreparably harmed by continuation of the stay, e.g., if the co-debtor’s own financial situation is worsening or the co-debtor is about to leave the jurisdiction.
The co-debtor stay issues frequently arise when the debtor assumes the debt as part of the divorce decree and does not offer to pay 100% of the assumed debt through the Chapter 13 plan. Because divorce decrees are not binding on creditors (a divorce decree is merely a contract between the spouses which is enforceable only by the family court), the creditor can lift the stay and proceed against the non-filing spouse (co-debtor).