The co-debtor stay is a nice feature of chapter 13 bankruptcy. When an individual files a bankruptcy case, there is an automatic “stay” that is put in place by the Bankruptcy Court. The automatic stay prevents creditors from collecting against a bankruptcy debtor. In chapter 13 that stay can also, in many cases, extend to co-signers and joint account holders. As long as the chapter 13 case is pending, other people obligated on debts that are “in” a chapter 13 case can be protected by the same automatic stay.
But there’s a restriction on the co-debtor stay. The co-debtor stay only applies to “consumer” debt. Consumer debt includes credit card debt, medical bills, lawyer bills and student loans, to name a few examples. But co-signers for non-consumer debt don’t receive the benefit of the stay. So a co-signer on a business loan, for instance, would not be able to use a business partner’s chapter 13 case as a shield from collection.
And the co-debtor stay doesn’t apply to tax debt, either. And due to the ways that you can become liable for taxes, it’s important for married couples who have tax problems to understand the way chapter 13 works if only one person files. The chapter 13 plan can propose to pay tax liability in full, and the non-filing spouse can still have wages garnished and bank accounts levied. Or the tax liability might be dischargeable at the end of the chapter 13, but the joint tax filer can be garnished or levied during the chapter 13 and after. So it’s important to be aware of the ways that taxing authorities can collect tax debt even when a chapter 13 client is trying to set up a sensible repayment. In many cases, the best course of action is to file a joint chapter 13 case to prevent collection against both spouses.
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