§ 65.3 — Codebtor Heaven after BAPCPA

Revised: July 3, 2007

[1]

With one obscure exception,1 it is as if the drafters of BAPCPA were unaware of the codebtor stay in Chapter 12 and Chapter 13 cases.2 BAPCPA made no changes to § 1301. The filing of a Chapter 13 petition prohibits any act or the commencement or continuation of any civil action to collect a consumer debt from “an individual that is liable . . . with the debtor . . . or that secured such debt.”3 There are narrow statutory exceptions4 and grounds for relief from the codebtor stay5—none of which were changed by BAPCPA.

[2]

The only recognition of the codebtor stay in BAPCPA is this reference in § 365(p)(3):

[I]n a case under chapter 13, if the debtor is the lessee with respect to personal property and the lease is not assumed in the plan confirmed by the court, the lease is deemed rejected as of the conclusion of the hearing on confirmation. If the lease is rejected, the stay under section 362 and any stay under section 1301 is [sic] automatically terminated with respect to the property subject to the lease.6
[3]

Some will conclude—with respectable authority—that the specific reference in § 365(p)(3) to relief from the codebtor stay demonstrates that the drafters of BAPCPA were aware of § 1301 and intended to leave its protections unbreached except for § 365(p)(3).

[4]

New § 365(p)(3) is somewhat oddly worded. “Automatically terminated” does not contemplate entry of an order. Would a codebtor on a lease of personal property have an entitlement to notice with respect to the “automatic” termination of the codebtor stay? In contrast to other amendments by BAPCPA,7 there is no provision in § 365(p)(3) for the lessor to request an order that the stay is terminated.

[5]

The many chunks taken out of the automatic stay in § 362 by BAPCPA,8 and the absence of analogous damage to § 1301, may suggest filing strategies to debtors’ attorneys. A married debtor with prior bankruptcy experience that will trigger one or more of the new limitations or terminations of the automatic stay9 may realize significant bankruptcy relief with respect to joint debts and jointly owned collateral if a spouse who lacks disabling bankruptcy experience files a separate Chapter 13 case.10 The extent of the codebtor stay is not enlarged by this strategy.11 But by not filing a case for the spouse with a § 362(c)(3) or (4) problem,12 the good-faith issues in those new sections do not pollute the standards for relief from the codebtor stay in § 1301(c)—which are both narrower and, in some respects, more difficult of proof than the grounds for relief from the § 362 stay.13

[6]

The message here is not that tag-team Chapter 13 filings by spouses are a good idea; rather, it is that the codebtor stay in § 1301 is alive and well despite a much less robust § 362 stay after BAPCPA. Chapter 13 is a more attractive solution to some consumer debt problems because the codebtor stay protects nonfiling spouses and other joint obligors in ways that are absent in a Chapter 7 or Chapter 11 case.

[7]

There is another amendment by BAPCPA that could affect one of the grounds for relief from the codebtor stay. Under § 1301(c)(2), a creditor is entitled to relief from the codebtor stay to the extent the plan “proposes not to pay such claim.”14 This ground for relief from the codebtor stay comes up often in Chapter 13 practice because it is difficult to pay postpetition interest to an unsecured codebtor claim through the plan.15 Chapter 13 debtors try but do not often succeed at confirming plans that pay co-signed debts in full with postpetition interest to protect the cosigner from collection.

[8]

BAPCPA added a new subsection (10) to § 1322(b) that permits a Chapter 13 plan to pay interest accruing after the petition on any unsecured claim that is nondischargeable under § 1328(a) “to the extent that the debtor has disposable income available to pay such interest after making provision for full payment of all allowed claims.”16 This amendment may have been targeted to encourage payment of postpetition interest on domestic support obligations when the debtor has sufficient disposable income to pay allowed unsecured claims in full.17

[9]

There are two implications here for relief from the codebtor stay under § 1301(c)(2). There will occasionally be a co-signed debt that is also nondischargeable under § 1328(a). When that combination occurs, new § 1322(b)(10) allows Chapter 13 debtors to avoid the ground for relief from the codebtor stay in § 1301(c)(2) by proposing a plan that pays postpetition interest when the debtor has sufficient disposable income to provide full payment of all other allowed claims. This won’t happen often, but might occur, for example, when there is a co-obligor on a credit card debt that is nondischargeable under § 1328(a)(2).18

[10]

Some courts may draw a negative inference from the enactment of new § 1322(b)(10) that Chapter 13 debtors are not permitted to provide for the payment of postpetition interest on unsecured claims other than those that are nondischargeable under § 1328(a). As mentioned, debtors sometimes separately classify co-signed debts for full payment with postpetition interest to protect a cosigner. This effort runs afoul of the unfair discrimination test of separate classification in § 1322(b)(1).19 That Congress specifically provided in new § 1322(b)(10) for payment of postpetition interest only on claims that are nondischargeable and then under narrow circumstances adds weight to the argument that separate classification of dischargeable unsecured debts for payment of postpetition interest is not fair discrimination.

[11]

There is an even more obscure new exception to the codebtor stay with respect to utility service setoffs. BAPCPA added a new subsection (c)(4) to § 366 that provides, “notwithstanding any other provision of law,” a utility may “recover or set off against a security deposit provided to the utility by the debtor before the date of the filing of the petition without notice or order of the court.”20 Without reference to the codebtor stay in § 1301, new § 366(c)(4) may be broad enough to immunize a utility’s setoff of a prepetition debt against a prepetition security deposit without notice and without relief from any stay. A Chapter 13 debtor often has a co-obligor with respect to a utility debt or the security deposit for a utility debt. It is likely that § 1301 provides no barrier to a postpetition setoff by a utility after BAPCPA.


 

1  See 11 U.S.C. § 365(p)(3), discussed below in this section and in § 495.1 [ Leases and Executory Contracts after BAPCPA ] § 102.3  Leases and Executory Contracts after BAPCPA.

 

2  See § 65.1  Cosigners and Joint Obligors Are Protected.

 

3  11 U.S.C. § 1301(a), discussed in §§ 84.1 [ Cosigners and Joint Obligors Are Protected ] § 65.1  Cosigners and Joint Obligors Are Protected and 85.1 [ Consumer Debts Only ] § 65.2  Consumer Debts Only.

 

4  See 11 U.S.C. § 1301(a)(1) and (2), discussed in §§ 84.1 [ Cosigners and Joint Obligors Are Protected ] § 65.1  Cosigners and Joint Obligors Are Protected, 85.1 [ Consumer Debts Only ] § 65.2  Consumer Debts Only and 85.3 [ Expiration of Codebtor Stay ] § 65.5  Expiration of Codebtor Stay.

 

5  11 U.S.C. § 1301(c), discussed in §§ 86.1 [ Motion Practice ] § 66.1  Motion Practice90.1 [ Irreparable Harm ] § 67.5  Irreparable Harm.

 

6  11 U.S.C. § 365(p)(3).

 

7  Compare 11 U.S.C. § 521(i)(2), discussed in §§ 388.1 [ Consequences of Failure to File Required Information, Including “Automatic Dismissal” ] § 42.2  Consequences of Failure to File Required Information, Including “Automatic Dismissal” and 425.1 [ Dismissal or Conversion before Confirmation ] § 55.4  Preconfirmation Dismissal or Conversion after BAPCPA.

 

8  See § 58.2  BAPCPA Shrank Stay.

 

9  See § 60.1  When Does § 362(c)(3) Apply?

 

10  But see In re Anderson, 341 B.R. 365 (Bankr. D.D.C. 2006) (Codebtor stay is no help to debtor with respect to state court action for possession of real property when debtor’s nonfiling spouse owned the real property and relief from the stay was granted in the spouse’s separate case to permit the state court action to continue.).

 

11  See § 84.1 [ Cosigners and Joint Obligors Are Protected ] § 65.1  Cosigners and Joint Obligors Are Protected.

 

12  See § 60.1  When Does § 362(c)(3) Apply?

 

13  Compare discussion of relief from codebtor stay beginning at § 66.1  Motion Practice with discussion of relief from § 362 stay beginning at § 63.1  Strategic Considerations

 

14  11 U.S.C. § 1301(c)(2), discussed in § 88.1 [ Plan Does Not Pay Debt in Full ] § 67.2  Plan Does Not Pay Debt in Full.

 

15  See § 89.1 [ Postpetition Interest, Attorneys’ Fees, Costs and Other Charges ] § 67.3  Postpetition Interest, Attorneys’ Fees, Costs and Other Charges.

 

16  11 U.S.C. § 1322(b)(10), discussed in § 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3  Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10).

 

17  See § 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3  Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10).

 

18  See § 549.1 [ False Representations and Fraud: § 523(a)(2) ] § 159.2  False Representations and Fraud: § 523(a)(2).

 

19  See § 89.1 [ Postpetition Interest, Attorneys’ Fees, Costs and Other Charges ] § 67.3  Postpetition Interest, Attorneys’ Fees, Costs and Other Charges.

 

20  11 U.S.C. § 366(c)(4), discussed in § 437.1 [ Utility Stay Uncertainty ] § 68.2  Utility Stay Uncertainty after BAPCPA.