Protecting a Consumer Co-debtor: Overview of Bankruptcy: Chapter 13 and Why to File, Part 6

Series: #11 0f 13

In our previous article, we discussed ways to avoid liquidating non-exempt assets in a Chapter 13 bankruptcy. This post will briefly discuss protecting a consumer co-debtor from liability.

Pursuant to 11 U.S.C. § 1301  – Stay of action against codebtor*, after filing a Chapter 13 bankruptcy, a creditor may not take any action to collect all or part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor unless the debtor incurred the debt in the ordinary course of the individual’s business or the case is dismissed or converted to Chapter 7.

In addition, 11 USC § 1322 – Contents of plan*(b)(1) allows a plan to treat discriminate (and pay in full) claims for consumer a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims.

Note that the debt is a consumer debt meaning that the debt was incurred for the personal use of the debtor or the debtor’s family and that it was the debtor who received the benefit of the debt. In order to fully protect that co-borrower from liability, it would also be wise to pay the claim in full with the contractual rate of interest so that the creditor will not attempt to collect any deficiency balance from the co-debtor once the debtor’s debts are discharged and the co-debtor stay has been lifted.

Next: Stripping Off Wholly Unsecured Mortgages

* Source: Cornell University Law School Legal Information Institute

 

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*Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.