How the Codebtor Stay Works
Under 11 U.S.C. 1301, when a debtor files Chapter 13, an automatic codebtor stay prevents creditors from pursuing cosigners, guarantors, and other co-obligors on consumer debts. This is a unique feature of Chapter 13 not available in Chapter 7. The stay takes effect automatically when the case is filed.
The codebtor stay runs concurrently with the debtor's automatic stay. It prevents creditors from taking any collection action against the codebtor, including lawsuits, garnishment, contact, and credit reporting of new delinquencies, as long as the debtor's plan proposes to pay the codebtor debt.
Limits and Exceptions
The codebtor stay has important limits: 1. Consumer debts only -- business debts are not covered. 2. Plan must address the debt -- if the debtor's plan doesn't propose to pay the cosigned debt, the stay may not apply. 3. Creditors can move to lift -- a creditor can file a motion to lift the codebtor stay if the debtor's plan doesn't pay their claim in full, the codebtor received the loan proceeds, or irreparable harm would result.
If the stay is lifted, the creditor can proceed against the cosigner while the debtor continues in Chapter 13. If the debtor's case is dismissed, the codebtor stay dissolves immediately and the creditor can pursue the cosigner for any unpaid balance.
Planning for Codebtor Protection
If protecting a cosigner is a priority, Chapter 13 may be preferable to Chapter 7 specifically because of the codebtor stay. Your Chapter 13 plan should provide for full payment of the cosigned debt to maximize the cosigner's protection. If the plan only pays a percentage, the creditor may move to lift the stay for the unpaid portion.
After the Chapter 13 plan is completed and a discharge is entered, the debtor's obligation is satisfied (to the extent provided by the plan). The cosigner's liability for any remaining unpaid balance technically survives, but if the plan paid the debt in full, there's nothing left to collect from the cosigner.
Frequently Asked Questions
Does the codebtor stay protect cosigners on student loans?
The codebtor stay applies to consumer debts being addressed in the Chapter 13 plan. Student loans can be included, but since they're generally not dischargeable, the debtor must pay them in full through the plan for the cosigner to receive lasting protection. If only a portion is paid, the cosigner remains liable for the rest after the plan.
What happens to the codebtor stay if the Chapter 13 case is dismissed?
The codebtor stay dissolves immediately upon dismissal. The creditor can then pursue the cosigner for the full remaining balance, plus any accrued interest. This is one reason completing the Chapter 13 plan is important -- dismissal exposes both the debtor and the cosigner.
Can I file Chapter 13 specifically to protect my cosigner?
Yes. Protecting a cosigner is a legitimate reason to choose Chapter 13 over Chapter 7. Many debtors who qualify for Chapter 7 choose Chapter 13 specifically because of the codebtor stay. Your attorney can structure the plan to maximize cosigner protection.
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