The Codebtor Stay

One of the little known facts about bankruptcy is the existence of the "codebtor stay". In most cases, when a bankruptcy is filed a "stay" is put into place. That means most proceedings against a Debtor's property must freeze in time and no further action can be taken against the property, so long as the stay is in effect.

In a Chapter 13 case, this stay will generally extend to codebtors. This is important because it means that a person who files a Chapter 13 may be able to protect co-signers of loans, without the co-signer having to file a bankruptcy. For example, if a person can no longer make payments on a loan that was co-signed for by a relative, but it was understood that the relative will not be the one making payments, that person can protect the co-signer from collection efforts and lawsuits by filing a Chapter 13 bankruptcy. There is no need for the co-signer to file an additional bankruptcy to obtain the benefits of the stay. The stay will be in effect so long as the case is open. However, the protection will stop if the Court grants relief from the stay, or there is a balance remaining after the Debtor completes the Plan.

There are two basic requirements for the co-debtor stay to be in effect. First, it must be a "consumer debt", meaning car payments, mortgage payments, credit cards, etc. Second, the co-signer must be an individual and not a corporate entity.

We have had many cases where a client comes to us because they have defaulted on a loan and the lender is seeking recovery against a co-signer, who only co-signed in an effort to assist the client. This is a very unfair situation because the co-signer was simply trying to help somebody and never thought he or she would be subject to collection efforts or, worse yet, a lawsuit. Employing the co-debtor stay is a good way to protect people who were just trying to lend a hand.

Seth W. Diamond is an attorney at Laura Margulies & Associates, LLC. in Rockville, Maryland. His firm represents individuals and companies in bankruptcy and litigation matters in Maryland and the District of Columbia. For more information about bankruptcy and the services offered by his firm, please feel free to visit the firm's website. If you would like to schedule an appointment to discuss bankruptcy with an attorney, call 301-816-1600, or click here.