When an individual files for bankruptcy they may have obtained a loan with a friend, spouse or family member. By doing this, they are on the loan together and enjoy the same benefits of the loan if timely paid as well as the same liabilities if the loan is defaulted.In Bankruptcy, if an individual is on a loan with another person that has not filed bankruptcy; the non-filing person obtains the same benefits of the protection of the bankruptcy case as the individual that did file from that particular creditor.
After someone files for bankruptcy the protection from creditors is automatically put into place. This protection prevents any creditors from collecting or taking any action to secure their interest on a loan against the bankruptcy filer.
At the same time, this protection is extended to a non-bankruptcy filer as well. This is a very generous benefit that a co-signor has even when they have not filed for bankruptcy. However, this benefit is not as far reaching as it may seem.
When a person files for bankruptcy they are generally trying to either reorganize their debts by making a monthly payment under Chapter 13 to keep a house or car, or they are seeking a completed discharge of their debts subject to the liquidation of their assets under Chapter 7.
In either case, if the individual that filed for bankruptcy cosigned a loan with another party that has not filed for bankruptcy, both will be protected from any collection efforts. However, if the individual that filed for bankruptcy decides to return the item back to the creditor or defaults on the loan while in bankruptcy that the non-filer cosigned a loan for, then the non-filer is no longer protected and the creditor can start making collection attempts against the non-filer.
Unfortunately, the non-filer will be on the hook unless he or she files a bankruptcy themselves, whereas the filing party receives the benefit of a complete discharge of the debt if they defaulted on the loan.
The co-debtor stay is most common for people who are married and only one spouse files for bankruptcy. In Texas, it is a community property estate; therefore, it is also a community debt state. Meaning, that a couple that incurs debt together during the marriage, regardless if the debt is only in the name of one spouse, the creditor may look to both of them for the debt because the presumption is they both received the use and enjoyment of the item or items purchased.
If one spouse files for bankruptcy and the other does not, the non-filing spouse will be protected from all creditors as long as the bankruptcy case continues. However, any debts that a creditor can prove are community debts remain against the non-filing spouse after the case is concluded. Therefore, it is almost always advisable, if married, to file a joint bankruptcy case.
The underlying principal is that the law in bankruptcy is set up to protect individuals and their property from any collection activities, even those individuals that did not file but are a co-signor or guarantor of a loan that is in bankruptcy.
However, the protection is only available for a period of time until the creditor decides to file a motion in the bankruptcy court or until the bankruptcy case is completed.
