The automatic stay of actions against co-debtors was a part of the Bankruptcy Reform Act of 1978. It was intended primarily for the protection of the principal debtor proceeding under Chapter 13 by insulating the debtor from the indirect pressures exerted by creditors on friends, relatives, and fellow employees. The co-debtor stay operates to delay collection efforts against individuals close to the debtor who have obligated themselves on debts incurred by and for the benefit of the Chapter 13 debtor. Generally, the co-debtor stay applies with respect to any consumer debt for which another individual is also liable, and it continues until the Chapter 13 case has ended.

Scope of Co-debtor Stay

Upon the entry of the order for relief under Chapter 13, the co-debtor stay automatically prohibits any act or civil action to collect any ''consumer debt'' from an individual liable with the Chapter 13 debtor or against an individual who has secured the debt, except where the co-debtor became liable or secured the debt in the ordinary course of the business of the co-debtor. The prohibition against any act to collect is broadly worded so that it can include actions such as perfection of a lien or placing an adverse notation in the co-debtor's credit report.

Exceptions to Co-debtor Stay

The presentment and notice of dishonor of a negotiable instrument is excepted from the reach of the co-debtor stay. In addition, the co-debtor stay operates to bar creditor action only against individual co-debtors and only in connection with a consumer debt, which is a debt incurred by an individual primarily for a personal, family, or household purpose. Divorce and home mortgage obligations are usually classified as consumer debts, but most courts have held that a tax debt is not a consumer debt. Also, debts incurred with a profit motive generally are not consumer debts.

Duration of Co-debtor Stay

The co-debtor stay takes effect by operation of law upon entry of the order for Chapter 13 relief and continues in effect until the Chapter 13 case is closed, dismissed, or converted to Chapter 7 or Chapter 11, unless it is modified or terminated under the Bankruptcy Code prior to that time.

Relief from Co-debtor Stay

The court must grant appropriate relief from the automatic co-debtor stay by way of modification, termination, amendment, or conditioning of the stay on the request of a party in interest, after notice and a hearing, to the extent that the co-debtor received the consideration for the claim; the plan does not propose payment of the debt; or the interests of the creditor would be irreparably harmed by continuation of the stay.

Procedure for Obtaining Relief from Co-debtor Stay

A motion must be filed in order to obtain relief from an automatic stay. The motion for relief from the stay must be served on parties in interest, including the debtor, the co-debtor, and the Chapter 13 trustee. The party seeking relief from the stay must show that the grounds for relief exist. Creditors are given a streamlined procedure for obtaining relief from the co-debtor stay when a motion is filed pursuant to the Federal Rules of Bankruptcy Procedure. The procedure dispenses with the necessity of obtaining a court order if neither the debtor nor co-debtor, within 20 days, files and serves upon the party seeking relief a written objection to the requested relief. Unless an objection is served and filed, the co-debtor stay with respect to the party requesting relief automatically terminates.

Grounds for Relief from Co-debtor Stay

1. Chapter 13 Debtor Did Not Receive the Consideration for the Claim. The court must grant relief from the co-debtor stay when, as between the chapter 13 debtor and the obligor who is not a Chapter 13 debtor, it was the latter who received the consideration for the claim held by the creditor.
   
2. The Plan Does Not Propose to Pay the Claim in Full. A creditor may also obtain relief from the co-debtor stay once the plan is filed if the plan does not propose to pay the creditor's claim in full.
   
3. Irreparable Harm to the Creditor's Interest. Relief from the co-debtor stay is also permitted when the creditor can show that its interests would be irreparably harmed by continuation of the stay.

Constitutionality of Co-debtor Stay

The automatic co-debtor stay operates to bar postpetition efforts by a creditor to collect a claim against a co-debtor of the principal Chapter 13 debtor. The constitutionality of the automatic co-debtor stay is clear because the stay is finely tuned and it is not relief for an individual that is not a debtor under the bankruptcy laws. The automatic co-debtor stay is not overbroad, it does not affect the creditor's substantive rights in any way, and the creditor remains entitled to full satisfaction. It is designed only to protect the principal debtor, not the co-debtor. Any protection of the co-debtor is incidental.

Enforcement of the Co-debtor Stay

The co-debtor stay is a statutory injunction and is enforceable by the court. A knowing violation of the co-debtor stay is contempt of court, punishable by damages, including attorney's fees. Any actions taken in violation of the co-debtor stay are void.

Copyright 2006 LexisNexis, a division of Reed Elsevier Inc.