LAWDOG BANKRUPTCY: CHAPTER 12
Co-Debtor & Personal Guarantee
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Co-Debtor Stay
Relief From Co-Debtor Stay
"Co-Debtor" Stay
A debt may be guaranteed by a third party, or it may be jointly owed by two
co-debtors. In a case where only one of the co-debtors has filed a bankruptcy petition, a
creditor's right to pursue against the non-bankrupt co-debtor may generally not be
affected by the bankruptcy of the other co-debtor or personal guarantor. However, a
special "co-debtor" stay provision may apply to a consumer debt where the debtor
has filed a Chapter 12 Bankruptcy. See Section 1201 reproduced here
for illustration purposes only.
Section 1201 of the Bankruptcy Code provides that in a bankruptcy for individuals
filed under Chapter 12, a creditor may NOT pursue
against a co-debtor or a personal guarantor, not in bankruptcy, if the debt is a
"consumer debt". Under Section 101 (8)
''consumer debt'' means debt
incurred by an individual primarily for a personal, family, or household purposes.
This rule does not apply where the case is
closed, dismissed, or converted to a case under chapter 7 or 11, or where such individual
became liable on or secured such debt in the ordinary course of such individual's
business. A similar rule applies in Chapter 13 cases.
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Relief From
Co-Debtor Stay
On request of a party in interest and after notice and a hearing, the court shall
grant relief from the stay with respect to a creditor, to the extent that the co-debtor or
guarantor received the consideration for the claim, the plan filed by the debtor proposes
not to pay such claim; or such creditor's interest would be irreparably harmed by
continuation of such stay.
Where a motion for relief from co-debtor stay is based upon the fact that the plan
filed by the debtor proposes not to pay such claim, the stay automatically terminates
twenty days later as to the party making such request, unless the debtor or any individual
that is liable on such debt with the debtor files and serves upon such party in interest a
written objection to the taking of the proposed action. See Section 1201(c) reproduced here for illustration purposes only.
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