What Protection is a Co-Debtor Granted?
Let’s start with the general rule: the relief granted in an individual’s bankruptcy case is limited to that individual. A co-debtor – whether a spouse, parent, or business partner – will remain liable for any debt on which they co-signed. If a husband and wife have a joint credit card and only the husband files for bankruptcy protection, the credit card company can still pursue the wife for payment.
Now, here’s the exception: in chapter 13 cases there is a “co-debtor stay” for consumer debt. That means that, for the duration of the debtor’s chapter 13 case (usually three to five years), creditors are prohibited from attempting to collect on that debt from the co-debtor. Once the case finishes, however, the automatic stay lifts as to the co-debtor and they are back right were they started. The co-debtor protection in chapter 13 cases is a temporary protection for the co-debtor.
The other aspect to the chapter 13 co-debtor protection is that it is limited to consumer debt. That means tax debt, bank loans obtained for your business start-up, and similar loans are excluded from this prohibition. If your business owes taxes, for instance, and there is officer liability for those taxes, ultimately, two bankruptcy cases must be filed: one for your business (if you wish to keep it operating) and one for you, individually. Dealing with your tax problems does not alleviate your businesses tax problems.
Around here, we think of the co-debtor stay as a kind of pleasant surprise. In general, each debtor must rise or fall on their own: each business, each person, each spouse. There are, however, occasional benefits for co-debtors. We’ll help you spot them.