The moment you actually declare, the automatic stay is triggered. The automatic stay is a temporary court injunction that stops collection actions against you. The automatic stay is invoked immediately upon filing the case – no hearing is necessary and no signature by the judge is required. The automatic stay continues until you receive a discharge, or the case is closed, or the stay is lifted or modified by operation of law or by the court.
The purpose of the automatic stay is to give the “debtor a breathing spell from his creditors, stopping all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.” This breathing spell provides time for the debtor, the bankruptcy trustee, and the bankruptcy court to get a handle on the debtor’s financial problem and work out an appropriate debt solution.
Greater protection during Chapter 13
Bankruptcy debtors receive even greater automatic stay protection during a Chapter 13 case. Section 1301 of the Bankruptcy Code extends this protection to Co-Debtors during a Chapter 13 case. Commonly called the “Co-Debtor Stay,” this temporary injunction is designed to insulate the debtor from indirect creditor pressure through friends or relatives.
For instance, if the debtor and his wife owe a mortgage arrearage, and the husband files Chapter 13 bankruptcy, the bank is prohibited from trying to collect from the wife while the husband cures the arrearage during the bankruptcy case. The Co-Debtor Stay applies to all individuals who are jointly obligated with the Chapter 13 bankruptcy debtor. It can be especially beneficial when only one spouse files bankruptcy and the couple has joint debts. The co-debtor stay protects the non-filing spouse from collection on most joint accounts during the bankruptcy.
There are some limitations to the Co-Debtor Stay. First, the Co-Debtor Stay is intended to protect the bankruptcy debtor, not the co-debtor. The Co-Debtor Stay does not eliminate the co-debtor’s legal obligation to pay the debt. However, the Co-Debtor Stay prevents collection action by the creditor against the co-debtor during the ‘pendency’ of the Chapter 13 case.
Second, the Co-Debtor Stay is only available in a Chapter 13 case. It does not apply in Chapter 7, 11 or 12 individual bankruptcy cases.
Third, the Co-Debtor Stay does not prohibit collection action from a business when it is jointly obligated with the Chapter 13 debtor. Section 1301 only protects applies to individual joint debtors, not business joint debtors.
Fourth, the Co-Debtor Stay does not apply to non-consumer (business) debts. Business debts are generally easily identifiable, although some courts have singled out certain obligation types as non-consumer debts, like personal taxes, medical debts and some student loans. Consequently, the Co-debtor stay is not available to protect a joint debtor when these debts are found to be non-consumer debts.
For example, suppose a wife files for Chapter 13 protection and her husband does not. The couple owes a federal income tax debt, which the wife proposes to pay during the Chapter 13 bankruptcy case. Courts that find that individual tax debts are non-consumer debts will not stop the IRS from garnishing or otherwise collecting from the husband during the wife’s Chapter 13 case.
This is an uncommon situation, and often the IRS will not collect from the non-filing spouse if the debt is being paid in a Chapter 13 but, the debtor must be aware of the potential consequences when analyzing options.
Modifying or terminating the Co-Debtor Stay
The Co-Debtor Stay can also be modified or terminated by the bankruptcy court. A creditor may be successful in terminating the Co-Debtor Stay if the debtor’s bankruptcy plan proposes to not pay the debt, or if the creditor’s interests would be irreparably harmed by continuation of the Co-Debtor Stay.
The Co-Debtor Stay may also be terminated if the creditor convinces the court that the co-debtor received “consideration” for the debt. The most common form of this is when the debtor co-signs or guarantees a secured loan. For instance, the debtor cosigned a car loan for a relative, who actually owns the car.
If a creditor knowingly violates the Co-Debtor Stay, the bankruptcy court may find the creditor in contempt of court and impose a fine and award damages, including attorney’s fees. A collection action taken by a creditor in violation of the Co-Debtor Stay is generally considered void, and not merely voidable.