A co-debtor stay will protect your cosigner if you take the proper steps. Your buddy or relative asked you to cosign so he could get a loan. He now needs to file a bankruptcy. You heard the filing can protect you. You first need to understand how it can happen.
- He must file a Chapter 13.
- The debt filed on must be a “consumer” debt.
- The chapter 13 plan must adequately protect the creditor
A co-debtor stay is only available in a chapter 13 case. If you cosigned on a bill for someone, they file chapter 7, and receive a bankruptcy discharge, bad news. You are on the hook for the entire unpaid balance with no chance to get help from the person you were good enough to help. You are in no better position than any other unsecured creditor. With a chapter 13 case you can be protected. Read on.
The chapter 13 co-debtor stay only works for “consumer” debts. To be a consumer debt it must have been for the personal, household or family use of the person you signed for. If you signed for someone to get money for a business, which is not uncommon, then even if they file a chapter 13 case there is no protection for the cosigner. What’s worse, they can be paying this bill in their plan and the creditor can still come after you for the unpaid balance to get their money faster.
“Adequate protection” was one of the favorite terms thrown around by Congress in the 2005 bankruptcy law amendments. It is legal mumbo jumbo meaning that someone is entitled to the full benefit of the bargain they made with you and the person you cosigned for. The plan must adequately protect the creditor. This is a 25 cent term meaning, “pay in full.” If the plan does not pay the debt in full then the creditor asks the court to remove the stay. Then guess what? You got it! They come after you for the unpaid balance.
It is automatically granted in a chapter 13 case when the bankruptcy petition is filed. If you are a cosigner, that fact is included on Schedule H of the bankruptcy petition. This will insure you receive all notices from the court. If a creditor wants to apply to remove it, they must file a Motion for Relief from Co-Debtor Stay.
One more thing, if it succeeds, it only will protect you, the cosigner, from collection action by the creditor. It will not prevent late payments or missed payments from being reported on your credit that occurred before the filing of the chapter 13. You did not file bankruptcy. The fact your friend filed, and you are benefiting has no business on your credit report. Be vigilant.