Most people understand that when they file for bankruptcy, they are provided financial protection. However, what is not as well-known is the fact that a debtor’s co-signors can also be protected in certain circumstances.
A co-debtor is somebody who is legally obligated on certain debts of the debtor. For instance, if a family member or friend co-signed on your loan, mortgage or other debt, they are your co-debtor for the purposes of bankruptcy.
A co-debtor is not protected if you file a Chapter 7. Thus, it is always important to confer with your co-signor before you file a Chapter 7 case.
If you file a Chapter 13 case, however, the automatic stay can extend to your co-debtor and this is commonly referred to as the co-debtor stay. The automatic stay and the co-debtor stay prohibit a creditor from pursuing you or your co-signor while the Chapter 13 case is pending. The reasoning is that as long as you, the debtor, are making your Chapter 13 plan payments, the creditor is being paid and the co-debtor will not face collection activity.
It should be noted that if your Chapter 13 case is dismissed for failure to make your plan payments, both you and your co-debtor lose the protection of the automatic stay. Thus, it is essential to work with a seasoned Chapter 13 attorney to ensure that you create a manageable and affordable repayment plan.
Further, you must understand that only consumer debts receive the co-debtor stay protection. In other words, a co-debtor on a tax debt is not protected. This means that if your spouse files for bankruptcy and you do not, and you jointly file your taxes, you will not be protected by the automatic stay and you can remain liable to pay the taxes. The same is true for business debts as well.
If you have questions regarding filing for bankruptcy or protecting a co-debtor, we can help. We are bankruptcy lawyers who know how to make a difference in your financial situation. We have experience you can rely on and we care about your results. Contact our New Jersey law firm online by filling out the form or by calling 973-323-2953 to schedule a free initial consultation with an attorney at Levitt & Slafkes, P.C..