How the Codebtor Stay Works

What Is the Codebtor Stay?

When someone files for Chapter 13 bankruptcy, most people know about the automatic stay under 11 U.S.C. Section 362 -- the immediate halt to all collection activity against the person who filed. But Chapter 13 includes an additional layer of protection that many people overlook: the codebtor stay under 11 U.S.C. Section 1301.

The codebtor stay is an automatic injunction that prevents creditors from taking collection action against any individual who is also liable on a consumer debt with the person who filed Chapter 13. In practical terms, it means that when you file Chapter 13, your cosigners, co-borrowers, and guarantors also get protection from creditor harassment, lawsuits, wage garnishments, and other collection efforts -- at least temporarily.

This protection exists only in Chapter 13. It is not available in Chapter 7, Chapter 11, or Chapter 12 cases. It is one of the most significant advantages of choosing Chapter 13 over other bankruptcy chapters when you have debts that another person has agreed to pay alongside you.

How Section 1301 Actually Works

The codebtor stay activates automatically and immediately when the Chapter 13 petition is filed with the bankruptcy court. There is no separate motion to file, no hearing required, and no court order needed to trigger it. The moment the case number is assigned and the petition is entered on the court's docket, the codebtor stay is in effect.

What the statute says

Section 1301(a) provides: "Except as provided in subsections (b) and (c), after the order for relief under this chapter, 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, or that secured such debt, unless such individual became liable on or secured such debt in the ordinary course of such individual's business."

This language covers a broad range of collection activity. It stops creditors from:

• Filing lawsuits against cosigners
• Continuing lawsuits already pending against cosigners
• Sending collection letters or making collection calls to cosigners
• Garnishing a cosigner's wages
• Placing liens on a cosigner's property based on the shared debt
• Repossessing collateral from a cosigner

The consumer debt requirement

The codebtor stay only applies to consumer debts -- debts incurred primarily for a personal, family, or household purpose. If the debt is a business obligation, the codebtor stay does not protect the co-obligor. Courts look at the purpose of the debt at the time it was incurred, not at how the proceeds were later used. A car loan for a vehicle used primarily for commuting to work is a consumer debt. A loan taken to purchase inventory for a business is not.

The individual requirement

The codebtor stay protects individuals only. If the co-obligor is a corporation, partnership, or LLC, they do not receive codebtor stay protection. This distinction matters when a business entity has guaranteed a personal debt or when the lines between personal and business obligations are blurred.

When the Codebtor Stay Takes Effect

The codebtor stay begins the moment the Chapter 13 petition is filed. In most courts, this happens electronically through the CM/ECF system, and the exact time is recorded on the docket. From that moment forward, creditors must stop all collection activity against protected codebtors.

Creditors are deemed to have constructive notice of the bankruptcy filing once it appears on the court's electronic docket. However, as a practical matter, many creditors do not learn about the filing immediately. It is good practice for the debtor's attorney to send notice to all creditors who hold codebtor-protected claims as soon as the case is filed, specifically identifying the cosigner and invoking Section 1301.

How Long the Codebtor Stay Lasts

The codebtor stay remains in effect until one of the following events occurs:

• The case is closed. When the Chapter 13 plan is completed and the case is administratively closed, the codebtor stay terminates.
• The case is dismissed. If the debtor fails to make plan payments, does not file required documents, or otherwise causes the case to be dismissed, the codebtor stay lifts immediately upon dismissal.
• The case is converted. If the case is converted to Chapter 7, Chapter 11, or Chapter 12, the codebtor stay terminates because Section 1301 applies only to Chapter 13.
• The debtor receives a discharge. Once the Chapter 13 discharge is entered, the codebtor stay terminates. However, by that point, the cosigned debt should have been addressed through the plan.
• The court grants relief. A creditor can file a motion under Section 1301(c) asking the court to lift the codebtor stay for cause. If the court grants the motion, the creditor can then pursue the cosigner.

In a successful Chapter 13 case, the codebtor stay typically lasts for the entire duration of the plan -- three to five years. During this entire period, the cosigner is shielded from collection activity on the protected debt.

Practical Scenarios

Parent cosigned a student loan

Maria's mother cosigned her private student loan. Maria falls behind on payments and files Chapter 13. Without the codebtor stay, the lender could immediately begin pursuing Maria's mother for the full balance. With Chapter 13, Maria's mother is protected as long as Maria's plan proposes to pay the student loan. If the plan proposes 100% payment of the student loan claim, the lender has no basis to seek relief from the codebtor stay because it will eventually be paid in full.

Spouse on a joint credit card

James and his wife Sarah are both liable on a joint credit card with a $15,000 balance. James files Chapter 13 but Sarah does not. Under the codebtor stay, the credit card company cannot pursue Sarah for the $15,000 while James's case is active. If James's plan pays the credit card at 100%, Sarah never hears from the creditor. If the plan pays less than 100%, the creditor can seek relief from the codebtor stay to pursue Sarah for the unpaid portion.

Friend cosigned a car loan

Kevin's friend Tom cosigned Kevin's car loan. Kevin files Chapter 13 and proposes to keep the car and pay the loan through the plan. Tom is protected by the codebtor stay during the plan. However, if Kevin surrenders the car and the loan is only partially paid, the lender could seek relief from the codebtor stay to go after Tom for any deficiency balance.

Family member guaranteed a personal loan

Angela's brother guaranteed her personal loan from a local bank. Angela files Chapter 13. The bank cannot contact Angela's brother for payment, cannot file a lawsuit against him, and cannot garnish his wages -- all because of the codebtor stay. If Angela's plan proposes to pay this loan at 100 cents on the dollar, her brother will never have to pay anything.

What the Codebtor Stay Does Not Do

The codebtor stay is powerful, but it has limits:

• It does not eliminate the cosigner's liability. The cosigner still owes the debt. The stay simply prevents the creditor from collecting during the Chapter 13 case.
• It does not protect business entities. Only individual codebtors are protected. Corporate guarantors, LLCs, and partnerships do not benefit from Section 1301.
• It does not apply to business debts. If the underlying debt was incurred for a business purpose, the codebtor stay does not apply, even if the cosigner is an individual.
• It does not survive dismissal. If the Chapter 13 case is dismissed for any reason, the codebtor stay lifts immediately, and creditors can pursue cosigners.
• It does not prevent the creditor from seeking relief. Creditors can file a motion under Section 1301(c) asking the court to terminate the codebtor stay. The motion must demonstrate one of three statutory grounds.

Frequently Asked Questions