§ 65.1 — Cosigners and Joint Obligors Are Protected
Revised: May 5, 2004
One of the extraordinary benefits of Chapter 13 is that nondebtor individuals who are liable with the debtor on consumer debts are protected from collection actions by the codebtor stay of 11 U.S.C. § 1301.
The codebtor stay protects Chapter 13 debtors from indirect pressure through coworkers, friends and relatives who are obligated with the debtor.1 Under other chapters, bankruptcy may discharge the debtor’s personal liability, but it leaves cosigners exposed to collection actions. Debtors will often voluntarily repay co-signed debts after discharge in a Chapter 7 case to protect a codebtor. The nondebtor can be protected in a Chapter 13 case by proposing full payment of the joint obligation and, in appropriate circumstances, by separate classification of co-signed claims for full payment even when the debtor is unable to pay all debts in full.2
Section 1301(a) states that 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 . . . .”3 The codebtor stay is not worded quite as broadly as the automatic stay in § 362(a); however, § 1301 is clear that a creditor cannot take action in or out of court to collect a co-signed consumer debt from the nonfiling codebtor. Notice that § 1301(a) only refers to the commencement or continuation of “any civil action.” The section does not stay a criminal action against a codebtor, even if it is in the nature of debt collection.4
There are few reported cases discussing either the reach of the codebtor stay or the appropriate sanction for its violation. One court expansively interpreted § 1301(a) to prohibit a “write off” notation on the credit report for a nondebtor comaker.5 This court held that the remedy for violation of § 1301 was appropriately borrowed from stay violation cases under § 362:6 “cause the profit and loss write off notation to be deleted from the non-debtor comaker’s credit report and [the creditor] shall cause the corrected credit report to be reissued to the affected parties . . . . [A]n award of damages to the debtor is appropriate . . . reasonable attorney fees and court costs in favor of the Debtors.”7 Other reported decisions determine whether sanctions are appropriate for a codebtor stay violation by reference to § 362 standards, sometimes with and sometimes without citation to § 362 itself.8
The codebtor stay is intended to protect debtors and only incidentally protects the nonfiling codebtor.9 When the Chapter 13 debtor is no longer personally obligated—for example, because the debt has been discharged in a prior Chapter 7 case—§ 1301 does not protects the cosigner.10 On the other hand, that the nonfiling codebtor has discharged personal liability in a separate bankruptcy case does not disrupt the codebtor stay when the Chapter 13 debtor remains personally obligated and the codebtor has pledged property to secure the debtor’s obligation.11
The codebtor stay delays collection of a co-signed claim to the extent the claim is paid through the Chapter 13 plan; the codebtor stay does not change the substantive rights of the creditor to ultimately collect its entire claim from the cosigner. As explained in the legislative history, “the [codebtor stay] does not prevent the creditor from receiving full payment, including any costs and interests, of his claim. It does not affect his substantive rights. It merely requires him to wait along with all other creditors for that portion of the debt that the debtor will repay under the plan.”12 Nothing in § 1301 presumes to discharge any obligation of the codebtor to the creditor.13
The codebtor stay protects “any individual that is liable on such debt with the debtor or that secured such debt.”14 This language is broad enough to protect traditional cosigners, joint obligors, guarantors, sureties and others who have permitted their property to be used to secure a claim against the debtor. On unusual facts, the individual protected by the codebtor stay was interpreted by one court to include the estate of a cosigner when the cosigner died before the debtor filed a Chapter 13 petition and the creditor sought to collect from the estate of the cosigner.15 The existence of a codebtor for § 1301 purposes is measured at the petition—that the creditor convinces a friend or relative of the debtor to co-sign a debt after the petition does not implicate the codebtor stay.16 Although it is not always simple to distinguish the principal obligor from the codebtor,17 if the debtor and the codebtor are jointly obligated, the debtor is protected by § 362 and the nondebtor is protected by § 1301. If the codebtor actually received the consideration, the creditor may be entitled to relief from the codebtor stay under 11 U.S.C. § 1301(c)(1).18 Even if the nonfiling codebtor is characterized as the principal obligor, the effect of § 1301 is unchanged—the codebtor is protected until relief from the codebtor stay is granted.19
Not every three-party debt involving the debtor will produce a codebtor protected by § 1301. For example, in Jett v. Norwest Financial (In re Jett),20 before the Chapter 13 petition, the debtor was ordered by a domestic relations court to pay his ex-spouse’s debt to Norwest. The confirmed plan proposed to pay 100 percent of Norwest’s claim; but after confirmation, Norwest demanded payment from the ex-spouse. The bankruptcy court found that the codebtor stay did not protect the ex-spouse because the debtor was obligated to her and not to Norwest. The court defined codebtor in § 1301 to mean “‘the signing obligor who did not receive the consideration for the claim held by the creditor, and, therefore, who put forward his creditworthiness and assumed liability on the debt solely for the benefit of the debtor now in bankruptcy.’”21 The court held the ex-spouse (Stephanie) did not satisfy this definition, though she was a creditor in the Chapter 13 case:
Stephanie should have been listed as an unsecured creditor in the plaintiff’s Chapter 13 petition and . . . she should have filed a claim in the case. . . . The [debtor] has characterized the subject debt as “co-signed” when in fact Stephanie is indebted to [Norwest] and the [debtor] is indebted to Stephanie. In seeking to protect Stephanie from collection efforts by [Norwest], the [debtor] has created an artificial scenario that does not correspond to the facts. . . . [Section] 1301 does not apply in this matter because Stephanie is [the debtor’s] creditor and not a co-debtor.22
The codebtor stay can prohibit collection action against property that is neither property of the estate nor property of the debtor. For example, when a third party has provided collateral for a debt, the codebtor stay prevents repossession notwithstanding that the collateral is not property of the Chapter 13 estate and is not property of the Chapter 13 debtor.23 Perfection of a lien on the nonfiling, codebtor’s property after the Chapter 13 petition violates the codebtor stay and is void (or voidable).24 Unlike most of the protections of the automatic stay in § 362, there is no property-of-the-estate or property-of-the-debtor predicate in § 1301. The codebtor stay prohibits “in rem” and “in personam” actions against the codebtor.25
Codebtors are not protected by § 1301 if the codebtor became liable on or secured the obligation in the ordinary course of the codebtor’s business.26 The codebtor stay does not protect commercial sureties. But an allegation that the debtor became obligated with the codebtor in the ordinary course of the debtor’s business does not forfeit the codebtor stay because the exception for liability in the ordinary course of business applies only to the nondebtor cosigner’s business.27
The codebtor stay is not a complete protection of the codebtor. 11 U.S.C. § 1301(b) permits the creditor to present a negotiable instrument and to give notice of dishonor to the codebtor. If the instrument or state law requires a creditor to give notice to a codebtor within some period of time after default, the creditor cannot argue that a Chapter 13 filing by the principal obligor prevented the giving of notice or presentment of the instrument to the nonfiling codebtor.
1 See H.R. Rep. No. 95-595, at 121 (1977):
[The codebtor stay] is designed to protect a Chapter 13 debtor from indirect pressure from a creditor exerted through his friends or relatives, to favor or prefer that creditor. A creditor is often able to obtain a co-signer on a loan when the loan is extended . . . . A creditor with a co-signer on a note is often able to use the threat of collection from the co-signer as leverage to obtain preferential treatment from the debtor. Most often, co-signers are relatives, friends, or co-workers of the debtor, who have signed as a favor to the debtor, without a full understanding of their ultimate liability on the debt. The moral pressure brought to bear on the debtor to protect his family or friends gives the creditor a significant advantage over other creditors in a way that is not related to legitimate financial considerations.
2 See § 150.1 [ Co-signed Debts ] § 87.3 Co-signed Debts.
3 11 U.S.C. § 1301(a).
4 Compare the effect of the automatic stay on criminal prosecutions, discussed in § 70.1 [ Criminal Action or Proceeding Exception ] § 58.7 Criminal Action or Proceeding Exception.
5 In re Sommersdorf, 139 B.R. 700, 701–02 (Bankr. S.D. Ohio 1991) (Write-off notation on credit report for nondebtor comaker is violation of § 1301. “[P]lacing of a notation on an obligor’s credit report . . . most certainly must be done in an effort to effect collection of the account . . . . [A] notation on a credit report is, in fact, just the type of creditor shenanigans intended to be prohibited by the automatic stay . . . . [T]he stay created by § 1301 is not as broad as the stay created by § 362. But the policies of the two provisions are related and the two provisions must be read together . . . Therefore, . . . the notation on the non-debtor comaker’s credit report violates the automatic stay of action against the codebtor of § 1301.”). Accord Singley v. American Gen. Fin. (In re Singley), 233 B.R. 170, 173 (Bankr. S.D. Ga.) (On motion for summary judgment, debtor may be entitled to some remedy under § 1301 when creditor truthfully informed credit bureau that debtor and nonfiling co-debtor were in a Chapter 13 case. “[E]ven if it is true that Movant’s report to the credit bureau contains truthful information that is a matter of public record, such a report, if made with the intent to harass or coerce a debtor and/or co-debtor into paying a pre-petition debt, could violate the automatic stays of section 362 and/or 1301.”), on reconsideration, 236 B.R. 105 (Bankr. S.D. Ga. 1999).
6 See § 78.1 [ Remedies for Violation of Stay ] § 62.5 Remedies for Violation of Stay.
7 139 B.R. at 702. See Singley v. American Gen. Fin. (In re Singley), 233 B.R. 170, 174 n.1 (Bankr. S.D. Ga. 1999) (In a footnote, “[u]nlike section 362, section 1301 contains no provision for awarding damages. Therefore, any damages award would have to result from a finding that Movant wilfully violated section 362.”).
8 See, e.g., In re Patti, No. 98-17719 DWS, 2001 WL 1188218 (Bankr. E.D. Pa. Sept. 14, 2001) (unpublished) (Plaintiff in state court litigation violated codebtor stay by not informing state court that one defendant had filed Chapter 13 and by not vacating resulting judgment against the codebtor. Judgments in violation of codebtor stay are “void ab initio.” Violator of § 1301 is in civil contempt, but attorney fees are refused because codebtor made no attempt to communicate with the creditor before actions were taken in violation of the codebtor stay.); Hope v. United Cos., Inc. (In re Holder), 260 B.R. 571, 576–77 (Bankr. M.D. Ga. 2001) (Perfection of lien against codebtor’s property violated codebtor stay and is void. “[I]t seems that Congress did intend for Section 1301’s codebtor stay to apply to the perfection of a creditor’s interest and did intend for the perfection of a security interest to be viewed as an act to collect all or any part of a debt. . . . Under Section 362 of the Code, stay violations are considered void ab initio . . . . [T]his same general rule should apply to codebtor stay violations under Section 1301.”).
9 “[The codebtor stay] is not relief for an individual that is not a debtor under the bankruptcy laws. It is designed only to protect the principal debtor, not the co-debtor. Any protection of the co-debtor is incidental.” H.R. Rep. No. 95-595, at 123 (1977).
10 In re Quinn, 60 B.R. 286 (Bankr. N.D. Ohio 1986).
11 See Heritage Fed. Credit Union v. Cox (In re Cox), 162 B.R. 191 (Bankr. C.D. Ill. 1993) (Codebtor stay of § 1301 prohibits foreclosure where prior to bankruptcy debtors conveyed real property to their daughter; the daughter borrowed money secured by the real property; but the debtors actually received the loan proceeds, continued to live in the residence, paid the taxes and insurance, and made payments on their daughter’s loan. That the daughter discharged her personal liability on the loan in a separate Chapter 7 case does not defeat the protection of the codebtor stay with respect to foreclosure on the real property owned by the daughter but in the possession of the debtors.).
12 H.R. Rep. No. 95-595, at 122.
13 “The [codebtor stay] is finely tuned. . . . It does not affect the creditor’s substantive rights in any way. It operates only as a procedural delay. The creditor remains entitled to full satisfaction.” H.R. Rep. No. 95-595, at 123.
14 11 U.S.C. § 1301(a).
15 In re Case, 148 B.R. 901, 902–03 (Bankr. W.D. Mo. 1992) (The “individual” protected by the codebtor stay includes the decedent estate of a cosigner. The debtor’s aunt co-signed a prepetition claim. The aunt died before the debtor filed a Chapter 13 petition. The bank holding the co-signed debt filed a claim in the probate estate. The debtor sought to amend the Chapter 13 plan to pay 100% of the co-signed claim. The bank moved for relief from the codebtor stay, arguing that the stay did not extend to the estate of the cosigner. “The decedent’s estate is simply the extension of an individual natural person and exists only for the purpose of distributing that individual’s assets, paying the individual’s debts and generally winding up the individual’s affairs after death. . . . [F]or all intents and purposes, a decedent’s estate is merely carrying out the decedent’s wishes. . . . The codebtor stay is ‘designed to protect a debtor operating under a Chapter 13 individual repayment plan case by insulating him from indirect pressures from his creditors exerted through friends or relatives that may have cosigned an obligation of the debtor.’ . . . When a codebtor dies, the burden of the codebtor’s obligation is transferred, in essence, to that individual’s legatees and heirs because any obligations paid by the decedent’s estate reduces [sic] assets that may be distributed to them. In a case, such as this one, where the cosigner is a relative of the debtor, the legatees and heirs are also likely to be relatives of the debtor. . . . Thus, the same policy considerations are present in relation to a creditor’s actions to collect a debt from a codebtor decedent’s estate as a creditor’s acts to collect from a living codebtor.”).
16 See In re Kirby, 151 B.R. 463 (Bankr. M.D. Tenn. 1992) (Debtor’s parents are not protected from creditor collection action by the codebtor stay because debtor’s parents were not codebtors for purposes of § 1301. Creditor, after the petition, convinced parents to buy the debtor’s obligation and to put up their home as collateral for the debt. These actions did not violate the codebtor stay.).
17 See, e.g., In re Lopez Melendez, 145 B.R. 740, 742 (D.P.R. 1992) (Under conjugal partnership law of Puerto Rico, an obligation contracted during a marriage becomes a community claim. The conjugal partnership is liable for the debt, and the obligation is chargeable to community property. However, if the intention is clear in the underlying loan document, it is possible under Puerto Rican law for the individual spouses to also be jointly and severally liable for a community claim. “Where the non-filing spouse has assumed personal liability, she should be protected [by § 1301] from collection.”); In re Cooper, 3 B.R. 246 (Bankr. S.D. Cal. 1980) (Under California law, it is not clear whether the debtor’s wife is a “debtor” or a “cosigner.”).
18 See § 87.1 [ Codebtor Received the Consideration ] § 67.1 Codebtor Received the Consideration.
19 See In re Patti, No. 98-17719 DWS, 2001 WL 1188218, at *6 (Bankr. E.D. Pa. Sept. 14, 2001) (unpublished) (Allegation that cosigner was the “primary obligor” and the debtor merely a guarantor does not forfeit codebtor stay because “‘Section 1301(a) simply makes no distinction between “primary” and “secondary” liability. The question is liability in general, and if both the debtor and co-debtor are liable, the co-debtor stay of § 1301 applies. . . . [T]o the extent that a debtor acts merely as a guarantor of debt incurred primarily by the co-debtor, § 1301(c)(1) provides relief from the stay in such a situation where only the alleged co-debtor received consideration for the claim.”); In re Zersen, 189 B.R. 732, 741 (Bankr. W.D. Wis. 1995) (Parents of debtor’s wife are codebtors protected by § 1301 where debtors received consideration, notwithstanding that bank documents indicate parents are the “primary obligors.” “Section 1301(a) simply makes no distinction between ‘primary’ and ‘secondary’ liability. The question is liability in general, and if both the debtor and co-debtor are liable, the co-debtor stay of § 1301 applies. . . . [T]he only time the co-debtor stay should be lifted are [sic] in situations in which the debtor is actually the co-debtor in the disputed transaction. In these circumstances, § 1301(c)(1) provides the creditor with relief from the stay to the extent that the nondebtor party received the consideration for the creditor’s claim. . . . Even under § 1301(c), however, the co-debtor stay should be lifted only in those situations where the debtor did not receive any of the consideration for the loan, as otherwise the indirect pressure to pay will still exist. . . . In this case, the Zersens and the Hills are clearly jointly obligated on the loan. . . . The Hills did not receive any of the consideration for the loan; the debtors did. The money was deposited directly into the debtors’ account. Therefore, there is no basis for finding that the debtors were actually the co-debtors. Even if the Hills were the ‘primary obligors,’ an assertion which is not borne out by the evidence, there is still no basis for precluding them from benefitting from § 1301 and the debtors’ plan. The co-debtor stay protects those who are ‘liable on such debt with the debtor,’ . . . and as the debtors received the loan proceeds the Hills are co-debtors within the meaning of that section.”).
20 198 B.R. 489 (Bankr. E.D. Ky. 1996).
21 198 B.R. at 490.
22 198 B.R. at 490.
23 In re Jones, 106 B.R. 33 (Bankr. W.D.N.Y. 1989). See Heritage Fed. Credit Union v. Cox (In re Cox), 162 B.R. 191 (Bankr. C.D. Ill. 1993) (Codebtor stay of § 1301 prohibits foreclosure where prior to bankruptcy debtors conveyed real property to their daughter; the daughter borrowed money secured by the real property; but the debtors actually received the loan proceeds, continued to live in the residence, paid the taxes and insurance and made payments on their daughter’s loan.).
24 See Hope v. United Cos., Inc. (In re Holder), 260 B.R. 571, 576–77 (Bankr. M.D. Ga. 2001) (Although perfection of lien was not a preference because it occurred more than 90 days before the petition, perfection violated the codebtor stay in former spouse’s separate Chapter 13 case. Debtor and former spouse were jointly liable for purchase of mobile home. During former spouse’s Chapter 13 case, lender perfected its lien. More than 90 days later, debtor filed Chapter 13 and trustee filed complaint to avoid perfection of the security interest. Bankruptcy court rejected the trustee’s preference theory because the lien was perfected more than 90 days before the debtor’s Chapter 13 filing. However, perfection violated the codebtor stay and was void: “[I]t seems that Congress did intend for Section 1301’s codebtor stay to apply to the perfection of a creditor’s interest and did intend for the perfection of a security interest to be viewed as an act to collect all or any part of a debt. . . . Under Section 362 of the Code, stay violations are considered void ab initio . . . . [T]his same general rule should apply to codebtor stay violations under Section 1301.” Chapter 13 trustee has standing to void the lien perfection as a violation of the codebtor stay.).
25 In re Jones, 106 B.R. 33 (Bankr. W.D.N.Y. 1989).
26 11 U.S.C. § 1301(a)(1).
27 In re Patti, No. 98-17718 DWS, 2001 WL 1188218, at *6 (Bankr. E.D. Pa. Sept. 14, 2001) (unpublished).