While married couples often file bankruptcy together, circumstances may exist that cause only one spouse to file a bankruptcy case. When this occurs in Chapter 13 cases, a non-filing spouse, like the spouse filing bankruptcy, may also be protected from the collection efforts of creditors despite his or her co-liability. The co-debtor stay is the term used to refer to the protection a non-filing spouse receives in this situation. A knowledgeable bankruptcy attorney will be familiar with the co-debtor stay and how it works in a Chapter 13 reorganization case.
The automatic stay in § 362 of the Bankruptcy Code is the hallmark mechanism and safeguard of United States bankruptcy law. It is termed as a “stay” because it is an injunction that stops or “stays” an action, activity, or event. It is “automatic” because it begins at the precise moment the debtor files the bankruptcy petition. § 362(a) provides that “a petition filed . . . operates as a stay, applicable to all entities . . .” Thus, it springs into effect when the bankruptcy petition is filed.
11 U.S.C. § 1301 provides that “a creditor may not act, or commence or continue 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 . . .” § 1301 refers to “any individual” rather than just a spouse. Thus, the co-debtor stay stops or enjoins actions to collect most debts from both the debtor and any non-filing parties, including a spouse.
The “co-debtor stay” is the term used by § 1301 to refer to the automatic stay remaining in effect and protecting the non-filing spouse from the continuing collection activities of creditors common to both parties. If the non-filing spouse did not have the protection of the co-debtor stay, a creditor could continue collection efforts against him or her, thus, sufficiently thwarting the reorganization efforts of the filing spouse. § 1301 tries to prevent creditors from indirectly applying pressure to Chapter 13 debtors.
Also, the co-debtor stay only applies in Chapter 13 cases since § 1301 expressly provides that a creditor may collect on a debt from a non-filing co-debtor in cases under Chapter 7 and 11. Thus, the automatic stay provides protection only for parties that actually file a Chapter 7 bankruptcy case. A creditor may proceed with collection activities against a co-debtor under Utah state law in this situation.
Prospective debtors that are self-employed must note that the co-debtor stay only applies to consumer debts, defined as those debts incurred for a personal rather than business purpose. § 1301 of the Bankruptcy Code provides that a creditor may not take action to collect a debt unless the co-debtor became liable for the debt in the ordinary course of business.
Creditors may not attempt to collect a debt from a co-debtor during an active Chapter 13 case. They may if the case is dismissed or converted to a 7 or 11. Until any of the aforementioned events occur, any attempt to collect the debt is a violation of the automatic stay, which is subject to penalties under the Bankruptcy Code.
If you are considering bankruptcy under Chapter 7 or 13, an experienced and qualified bankruptcy attorney may help you accurately review and carefully consider your options as you consider bankruptcy as a viable solution to financial hardship. Perhaps more importantly, an experienced and qualified bankruptcy attorney may help you throughout the entire lifespan of a bankruptcy case.
Most debt collectors assume that consumers are unaware of their rights and protections under federal law. However, Theron Morrison cares about protecting your rights. Theron Morrison has the necessary experience to ensure that all consumers receive the full benefit of the protections afforded them by federal and state law. Call 801.456.9933 today to schedule a FREE consultation. We have locations in Ogden, Logan, Sandy, and St. George to serve the residents of the counties of Weber, Cache, Salt Lake, Utah, Morgan, Davis, Washington, and surrounding areas.
