Relief from the Codebtor Stay

When the Codebtor Stay Can Be Lifted

The codebtor stay under 11 U.S.C. Section 1301 is not absolute. Congress included three specific grounds in Section 1301(c) on which a creditor can ask the bankruptcy court to terminate, annul, or modify the codebtor stay. If the creditor files a motion and demonstrates one of these grounds, the court can grant relief -- allowing the creditor to pursue the codebtor directly.

Understanding these three grounds is essential for any debtor who wants to protect a cosigner. It is equally important for cosigners who want to know when their protection might end and what they can do about it.

Ground 1: The Codebtor Received the Consideration

Section 1301(c)(1) allows relief when "as between the debtor and the individual protected under subsection (a) of this section, such individual received the consideration for the claim held by such creditor."

In plain language, this means the codebtor was actually the person who benefited from the loan. The "cosigner" was really the primary user of the funds, and the debtor was the one helping them get the loan.

How this plays out in practice

Consider this scenario: a father cosigns a car loan for his daughter. The daughter files Chapter 13 bankruptcy. The codebtor stay would normally protect the father. But if the evidence shows that the father was actually the one driving the car and making the payments -- that the daughter only signed the loan to help the father qualify -- then the creditor could argue that the father "received the consideration" and should not be protected by his daughter's bankruptcy.

Courts look at who actually received and used the loan proceeds, not just whose name is on the loan documents. If the codebtor was the true beneficiary, the court is likely to grant relief under this ground.

Ground 2: The Plan Does Not Propose Full Payment

Section 1301(c)(2) allows relief when "the plan filed by the debtor proposes not to pay such claim."

This is the most commonly litigated ground for relief from the codebtor stay. If the debtor's Chapter 13 plan does not propose to pay the cosigned claim at 100 cents on the dollar, the creditor can argue that it should be allowed to pursue the codebtor for the unpaid portion.

What counts as "not paying" the claim

Courts interpret this provision broadly. It does not just apply to situations where the plan pays $0 on the claim. If the plan proposes to pay 60% of the cosigned claim, the creditor can seek relief for the remaining 40%. If the plan proposes to pay the claim over 60 months but the creditor is entitled to interest that the plan does not include, the creditor may argue that the plan does not fully pay the claim.

Partial relief

Under this ground, the court often grants partial relief rather than lifting the codebtor stay entirely. If the plan pays 75% of the claim, the court may lift the codebtor stay only with respect to the remaining 25%. This means the creditor can pursue the codebtor for 25% of the debt but must wait for the plan to pay the other 75%.

Ground 3: Irreparable Harm to the Creditor

Section 1301(c)(3) allows relief when "such creditor's interest would be irreparably harmed by continuation of such stay."

This is the broadest and most fact-specific ground. The creditor must demonstrate that its interest will be irreparably harmed if the codebtor stay continues. Courts generally require the creditor to show more than just inconvenience or delay -- the harm must be genuine and not adequately compensable through the plan.

What constitutes irreparable harm

Examples that courts have considered:

• The collateral securing the debt is depreciating rapidly and the creditor needs to pursue the codebtor to protect its security interest
• The codebtor is wasting or disposing of assets that could be used to pay the claim
• The debtor's plan is unlikely to succeed, leaving the creditor without any recovery if the codebtor stay remains in place until the case is eventually dismissed
• Significant delay in the case that extends the period during which the creditor cannot collect from the codebtor

This ground is harder for creditors to establish because most harms can be addressed through the plan or through other bankruptcy mechanisms. Courts are generally reluctant to grant relief on this ground alone unless the circumstances are compelling.

The Motion Process

Filing the motion

A creditor seeking relief from the codebtor stay must file a written motion with the bankruptcy court. The motion must identify the codebtor, describe the debt, and specify which ground or grounds under Section 1301(c) the creditor relies on. The motion must be served on the debtor, the debtor's attorney (if any), the codebtor, and the Chapter 13 trustee.

The 20-day rule

Section 1301(d) provides an important procedural safeguard: if no party in interest -- the debtor or the codebtor -- files a written objection within 20 days after the motion is served, the court "shall" grant such relief as requested by the creditor. In other words, failing to respond means the codebtor stay will be lifted by default.

The hearing

If the debtor or codebtor files a timely objection, the court will schedule a hearing. At the hearing, the creditor bears the burden of proving that one of the three statutory grounds exists. The debtor and codebtor can present evidence and arguments in opposition.

The court's decision

The court has broad discretion in fashioning relief. It can deny the motion entirely, grant full relief (lifting the codebtor stay completely), or grant partial relief (lifting the stay only to the extent of the unpaid portion of the claim). The court can also condition relief on certain events, such as giving the debtor time to modify the plan to provide for full payment.

How to Respond to a Motion for Relief

If a creditor files a motion for relief from the codebtor stay, time is critical. Here are the key steps:

1. File a written objection within 20 days. This is mandatory. If no objection is filed, the court must grant the creditor's request. The objection preserves your right to a hearing.
2. Address the specific ground cited. If the creditor relies on Ground 2 (plan does not pay the claim), consider modifying your plan to propose 100% payment. If the creditor relies on Ground 1, prepare evidence showing who actually benefited from the loan proceeds.
3. Propose adequate protection. If you cannot pay the claim at 100%, consider what alternatives you can offer -- such as direct payments by the codebtor to cover the shortfall, or an increased plan payment that covers the full claim.
4. Attend the hearing. Present your case to the court. Bring evidence of your plan payments, your budget, and any facts that undermine the creditor's motion.

What Happens If Relief Is Granted

If the court grants relief from the codebtor stay, the creditor can pursue the codebtor directly for the amount specified in the court's order. This means the creditor can:

• Send collection letters and make collection calls to the codebtor
• File a lawsuit against the codebtor in state court
• Garnish the codebtor's wages (subject to state garnishment laws)
• Place liens on the codebtor's property

The codebtor still has all the defenses available under state law, including challenging the amount owed, asserting any applicable statute of limitations, or negotiating a settlement. The codebtor could also file their own bankruptcy case if their financial situation warrants it.

Relief from the codebtor stay does not affect the debtor's own bankruptcy case. The debtor's automatic stay under Section 362 remains in effect, and the debtor's Chapter 13 plan continues to operate. Only the codebtor loses their Section 1301 protection.

Frequently Asked Questions