What is the codebtor stay?
The co-debtor stay is a special feature of chapter 13 bankruptcy, provided under 11 U.S.C. §1301. Bankruptcy cases carry with them a bankruptcy automatic stay which goes into effect on filing of a bankruptcy case to stop essentially all collections activity. The co-debtor stay is a relative of the automatic stay, but instead of protecting the debtor, it protects co-signers or co-obligors in particular ways.
Only consumer debts are covered by the co-debtor stay. Consumer debts are defined as those incurred for a "personal, family, or household purpose" (§101(8)). The most obvious exclusion is business debts, but other debts such as torts (e.g. personal injury lawsuits) are generally also not consumer debts. The co-debtor stay also doesn't protect individuals who are in the business of guarantying or securing debts.
A creditor can request the co-debtor stay be lifted. Three reasons are provided by the statute:
- The value of the loan went to the non-bankruptcy borrower. This is the situation where the chapter 13 case was filed by the co-signer of someone else's loan.
- The Chapter 13 plan proposes to not pay the claim.
- The stay irreparably harms the creditor's interest.
Why is the co-debtor stay needed?
Without the co-debtor stay, a creditor could sue the co-signer for the debt while the bankruptcy was pending, even if the bankruptcy proposed to pay-off the debt in full. The co-debtor stay facilitates reorganizing joint debts in bankruptcy.