co-signer-bankruptcy consumer bankruptcy
Someone owes me money and just filed for bankruptcy. A parent co-signed on the debt and now I’m being told that even though the parent is on the debt, I can’t collect from her. Why can’t I collect against the co-signer?
You can collect against the parent, but if the case is a Chapter 13 bankruptcy, you might need to wait. Relief under Chapter 13 includes a co-debtor stay, or a provision that keeps creditors from pursuing collection against a co-debtor for a certain period of time. The co-debtor stay was created to prevent creditors from indirectly pressuring debtors to pay by collecting debts against co-signers. Most co-signers are friends or relatives of the debtor, and would be able to apply significant social pressure on the debtor to pay the debt in spite of the pending bankruptcy.
The co-debtor stay does not apply to every debt. It only applies to consumer debts and it excludes debts taken on in the ordinary course of business. In some cases you could also get the stay lifted. Those cases include:
Cases where the debtor didn’t get the benefit of the transaction. If you sold a computer to Jack and Sue co-signed, and Sue later files for bankruptcy. You can get the co-debtor stay lifted to collect the debt from Jack as long as you can establish that Sue didn’t get the computer.
The plan proposes not to pay the debt. If the debtor isn’t proposing to pay your claim, you can get the stay lifted so you can collect against the co-signer.
Your interest would be irreparably harmed unless the stay was lifted. This ground might apply if the plan proposes only marginal payments on the debt.
To be clear, if these grounds exist in your case, you need court permission to pursue the debtor. You would need to file a motion with the court in order to get an order lifting the co-debtor stay. Violating the stay is a serious matter for which the court could fine you.
The stay lasts as long as the Chapter 13 bankruptcy is pending. It ends when the case is closed or dismissed or if the case gets changed to a Chapter 7 or Chapter 11 bankruptcy.
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