During chapter 13 proceedings, both the debtor and the non-filing co-debtor are protected from their creditors by a stay. Once a bankruptcy petition is filed, section 362(a) of the Bankruptcy Code creates an “automatic stay” that operates by halting almost all actions by creditors against the debtor and his property to collect a prepetition debt. In a chapter 13 bankruptcy case, section 1301(a) provides that the filing of the petition also automatically creates a co-debtor stay that generally prevents a creditor from taking any “act[ion], or commenc[ing] or continu[ing] any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor, or that secured such debt.” Unless the co-debtor stay is modified or terminated, it will remain in effect until the debtor’s chapter 13 bankruptcy case is closed, dismissed, or converted to chapter 7 or chapter 11.
Importantly, although the co-debtor stay protects a non-filing co-debtor during the debtor’s chapter 13 bankruptcy case, section 524(e) provides that the debtor’s discharge does not affect the co-debtor’s contractual obligations. Therefore, once the debtor receives a discharge, section 524(e) leaves the non-filing co-debtor liable for the remainder of the co-signed debt. “[T]here is nothing in [section] 524 that prevents [the secured creditor] from asserting its rights against the non-filing co-debtor for the deficiency balance,” and therefore, a secured creditor is not barred from bringing an action against a non-filing co-debtor once the case is closed. This outcome is significant because “many cosigners are friends and relatives of the debtor, who want to and maybe even feel obligated to help their loved one.” Creating a “fresh start” for debtors is one of the fundamental goals of bankruptcy; however, allowing creditors to seek post-discharge repayment from non-filing co-debtors may frustrate this goal.
This Article will discuss the general implications of co-debtor stays under a chapter 13 bankruptcy estate and some potential solutions to alleviate the informal pressure to re-pay non-filing co-debtors. Part I analyzes the current application of co-debtor stays in section 1301. Part II discusses co-debtor releases in relation to section 524. Finally, Part III concludes by identifying a possible way for chapter 13 debtors to eliminate, or at least reduce a non-filing co-debtor’s post-confirmation liability.