Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “Does my spouse have to file bankruptcy if I do?”
Most people who are considering filing for bankruptcy protection have heard about an automatic stay. The automatic stay is an important feature of the bankruptcy process in that it prevents creditors from collecting on a debt. This goes into effect immediately when a bankruptcy case is filed with the court and protects the debtor from harassment or wage garnishment related to his or her debts.
While the automatic stay is great for the person filing for bankruptcy protection, there are cases where other people have co-signed debt. What happens to them? Well, if there is no co-debtor stay put into place then the co-debtor, who could be a spouse, parent, friend or even business partner, will then be liable for the full amount of the debt. The problem is that this exerts pressure on the person filing bankruptcy to go ahead and pay the debt rather than saddle their friend or family member with the entirety of the loan, thus defeating the purpose of filing for bankruptcy protection.
To avoid this problem, Congress created what is known as the co-debtor stay, which functions much like an automatic stay, but for the co-signer to a loan. The co-debtor stay works by extending this protection to co-debtors that did not file bankruptcy themselves, preventing creditors from pursuing the co-debtor for the duration of the bankruptcy.
Though this is all good news, there are some important things to understand about co-debtor stays. First, co-debtor stays do not exist in Chapter 7 bankruptcies. The co-debtor stay only applies when a debtor files for Chapter 13 bankruptcy protection. Next, the co-debtor stay only applies to consumer debt, meaning that things like credit cards, medical debt, car loans and mortgages fall under this umbrella. However, business debt and tax debts do not.
Additionally, the co-debtor stay only protects those co-debtors who are individuals and does not protect companies that have co-signed debt. Finally, and perhaps most importantly, the co-debtor stay does not discharge that person’s liability for the underlying debt, it just suspends payment for the duration of the bankruptcy process.
This is crucial to understand given that once a person emerges from bankruptcy, their liability for the debt will be gone. However, the co-debtor will remain responsible for whatever portion of the debt has not yet been paid. This means that if a bankruptcy repayment plan ends up paying off 30 percent of a co-signed debt, then the co-debtor will remain liable for the remaining 70 percent once the bankruptcy is over.
Co-debtor stays come to an end when the debtor’s Chapter 13 bankruptcy case is closed, dismissed or converted to a Chapter 7 bankruptcy. When any of these things happen the creditor will then be allowed to begin attempting to collect from the co-debtor and no protection from the bankruptcy court will be offered.
If you find yourself needing the services of a Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC today at (704) 370-2828. As professionals who are experienced in the bankruptcy arena, our attorneys will provide you with the best advice for your particular situation.