How the Codebtor Stay Protects Cosigners

A person who cosigned a loan can feel the effects of someone else’s bankruptcy. Chapter 13 includes a rule that shields certain cosigners while a repayment plan is active. We explain who the rule protects, when it ends, and how a creditor can ask the court to lift it.

The Codebtor Stay Protects Cosigners

Section 1301 of the Bankruptcy Code says that after a Chapter 13 order for relief, a creditor may not act to collect a consumer debt from an individual who is liable on that debt with the debtor, or who secured it. This protection is the codebtor stay. It covers the people who signed alongside the filer, such as a family member or friend who cosigned.

The stay isn’t permanent, and the statute names two exceptions. The stay doesn’t protect an individual who became liable on the debt in the ordinary course of that individual’s business. It also stops when the case is closed, dismissed, or converted to a case under Chapter 7 or Chapter 11.

Cosigned credit card balances are consumer debts of the kind the stay covers, and a Denton credit card debt lawyer can check whether a particular account qualifies. Checking each account early shows which cosigners the stay reaches.

A Creditor Can Ask the Court to Lift the Stay

Subsection (c) lets a party in interest request relief, and the court must grant it, after notice and a hearing, to the extent that any of these grounds applies:

• The cosigner actually received the consideration for the creditor’s claim
• The debtor’s plan proposes not to pay the claim
• The creditor’s interest would be irreparably harmed by continuing the stay

Subsection (d) gives a creditor a quicker path when the plan doesn’t propose to pay its claim. For that creditor, the stay lifts 20 days after the request, unless the debtor or the codebtor files and serves a written objection.

A creditor holding a cosigned home loan can ask for relief on the same grounds, and a Denton mortgage lawyer can review the loan terms. Those terms affect how the loan is treated in the plan.

How the Plan Treats Each Cosigned Debt Matters

Because relief turns partly on whether the plan proposes to pay the claim, how the plan treats a cosigned debt matters. A plan that proposes to pay the cosigned debt removes one ground a creditor could use to lift the stay. That choice is made when the plan is drafted.

Denton residents with cosigned loans can ask a Denton Chapter 13 bankruptcy lawyer how each debt would be handled in a repayment plan. The answer depends on the loan documents and the plan.

Information to Bring to a First Meeting

A debtor who has cosigners should assemble the following:

• A list of every loan or account that someone else signed
• The names and addresses of each cosigner
• The original loan papers, if they are available
• Records showing who received the money or the property

The last item matters because the statute looks at whether the cosigner received the consideration for the claim. A loan that bought a car for the cosigner raises a different question than a loan that paid the debtor’s own bills.

Income, Spouses, and Chapter Choice Shape the Plan

Chapter 13 depends on income, and the Chapter 13 means test shapes what a plan can look like. Debtors in Denton should review the means test before deciding on a plan.

A spouse who cosigned may ask whether both people have to file. Texas households can read how filing without a spouse works before deciding.

Some debtors weigh Chapter 7 against a repayment plan. Comparing Chapter 7 versus 13 helps a family choose the path that fits their income and their debts.

Our Work With Texas Debtors

Bankruptcy filers in Denton can work with us at Leinart Law Firm. James M. Morrison, a Texas bankruptcy attorney with our firm, has been licensed in Texas since 1988 and has decades of experience representing consumer debtors. He earned his J.D. at the SMU Dedman School of Law in 1988.

Cosigners Are Easier to Protect Before Filing

The codebtor stay can shield the people who helped a debtor borrow, and the plan decides how much protection a particular loan receives. Anyone in Denton who cosigned a loan or has a cosigner can reach out to us to review the debts before a plan is filed.