I. The Automatic Stay
Simply put, the automatic stay stays all actions by the debtor’s creditors against the debtor as a person (in personam), and against the property (in rem) of the debtor and of the bankruptcy estate that is created upon the filing of the papers. In practical terms – with a few exceptions listed in § 362(b) – this means that creditors must stop all direct communications with the debtor, all attempts to collect money or other assets from the debtor, all lawsuits against the debtor, and all attempts to exercise control over the debtor’s (or the estate’s) property. Willful violations of the automatic stay can be expensive mistakes because the debtor who successfully sues in the Bankruptcy Court under § 362(k) can collect damages including costs, attorney’s fees, and punitive damages.
Thus, the automatic stay provides some very important protection to a debtor who files for bankruptcy protection.
II. The Chapter 13 Codebtor Stay
If the debtor files under Chapter 13 there is another stay that is triggered that protects, not only the debtor, but also codebtors of the debtor. Unsurprisingly, it is referred to as the codebtor stay, and it is found in 11 U.S.C. § 1301(a). The portion I will focus on today is:
[A]fter the order for relief under this chapter, 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 . . .
Read the rest of this Bankruptcy Code section for its caveats.
The issue of the codebtor stay arises most commonly when only one member of a married couple files under Chapter 13, perhaps because the nonfiling spouse doesn’t want to file, or is ineligible for a discharge because of a relatively recent previous bankruptcy. The filing spouse must, of course, list the nonfiling spouse’s debts because of California’s community property law regarding “community debt”:
Except as otherwise expressly provided by statute, the community estate is liable for a debt incurred by either spouse before or during marriage, regardless of which spouse has the management and control of the property and regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.
Since the nonfiling spouse is a codebtor, the codebtor stay applies, meaning that the creditors cannot go after the nonfiling spouse. There are exceptions. Read the statute for details.
III. Obtaining Relief Against The Violating Creditor
Given the intimate statutory connection between the automatic stay and the codebtor stay, the injured codebtor could try seeking the relief under 11 U.S.C. § 362(k), which provides:
[A]n individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages . . .
Note in particular, that the relief afforded by this subsection is not limited to the debtor, but extends to any injured individual. See, e.g., In re Sommersdorf, 139 B.R. 700, 701 (Bankr. S.D. Ohio 1991) (awarding damages to the debtors for the creditor’s violation of the codebtor stay because the legislative histories of § 1301 and § 362 make it clear that both provisions were enacted to protect the debtor).
However, a court might object to an appeal to 11 U.S.C. § 362(k) because of its use of the phrase: “. . . provided by this section . . .”, since § 362(k) makes no mention of § 1301(a), and § 1301 does not have a provision analogous to § 362(k).
Therefore, in the alternative, the codebtor should also seek relief under 11 U.S.C. § 105(a), which provides:
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.
See, e.g., Patti v. Fred Ehrlich, PC, 304 BR 182 (E.D. Penn. 2003) (district court affirming of the bankruptcy court’s finding the creditor in violation of the codebtor stay, and awarding sanctions for civil contempt pursuant to 11 U.S.C. § 105(a)); In re Bertolami, 235 B.R. 493, 498 (Bankr. S.D. Fla. 1999) (granting the debtor’s motion for sanctions for violation of the codebtor stay).
Although I have limited my discussion to the application of the codebtor stay to the case where the codebtors are married to each other, its protection extends to any codebtor – even nonrelatives.
If you have filed for Chapter 13 protection and a creditor is going after one of your codebtors, seek the advice of a good bankruptcy attorney to learn of your rights and options.