The drafters of the 1978 Bankruptcy Code knew something about the lives of real people and some of the generally accepted people practices. They included two priceless provisions that allow debtors to protect co obligors with the debtor through the Chapter 13 plan.
Co debtor Stay
How often have our clients drawn on family or friends to co sign a loan? If filing bankruptcy results in collection action against someone who helped you out when you needed it, there’s a real barrier to filing. Thus, the co debtor stay of §1301.
The co debtor stay applies to those liable with the debtor on a consumer debt. So, it doesn’t protect a co obligor on taxes, business debts, or tort claims, all of which are non consumer. But it does stay action on the garden variety personal loan, car loan, or joint credit card debt.
The protection of the stay can be withdraw, upon a motion for relief from stay, if the non debtor party got the benefits of the transaction in question. That is, if the debtor was cosigning a car loan for someone else to get wheels, then the non filer who got the benefit isn’t protected from collection action by reason of his co signor’s Chapter 13.
Another grounds for relief from the co debtor stay is that the debtor’s plan doesn’t propose to pay the claim. 1301(c)(2). Which brings us to the second statutory treasure.
Separate Classification of Joint Debts
A co signed debt is an exception to the provision that classes of creditors created in a Chapter 13 plan must not discriminate unfairly. However, says §1322(b)(1) , “the plan may treat claims for a consumer debtor of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims.” Viva la difference!
I used this provision to separately classify a $26,000 credit card claim which my client jointly owed with a parent. Issuer of joint card got paid in full; other unsecured creditors got nothing, and this discrimination was not “unfair”.
Another Tool in Your Tool Box
As you unravel the client’s financial connections to family and friends, don’t forget the favorable treatment that is possible for those shared debts in Chapter 13.
Image courtesy of aaronisnotcool.