When there are debts, co-debtors are obligated to pay a debt if the person/entity who incurred the debt does not pay. When a bankruptcy petition has been filed by just one of the co-debtors, a creditor may pursue payment from the non-bankrupt co-debtor.
When the bankruptcy case goes to discharge, just because a debt is discharged for the debtor who files bankruptcy, the debt is not discharged against the non-bankrupt co-debtor.
In a bankruptcy petition, the petitioner needs to disclose co-debtors associated with the debts. The debtor should have an attorney find out if the:
1. debt is secure or unsecure
2. bankruptcy petitioner is the primary or secondary debtor on the agreement
3. items used for collateral on the debt is in the possession of the bankruptcy petitioner, and if the petitioner will surrender the item in the bankruptcy.
A bankruptcy discharge doesn’t make the liability of a co-debtor disappear. The co-debtor may still be obligated to pay the debt. If it is a Chapter 13, the co-debtor stays in Chapter 13 only until the bankruptcy case is closed, which may be three or even five years after the petition is filed. The three to five years depends on the approved repayment plan. In a repayment plan, the debtor who files bankruptcy makes a payment to the trustee who divides the payment among the creditors. After the plan is met, the remaining debts are discharged.
The bankruptcy petitioner may establish special payment classes in a Chapter 13 repayment plan to pay co-signed debts in full to protect the co-debtor. The co-debtor may remain exposed if the co-debtor is the one who actually got the consideration for the debt (e.g., the mother co-signs a car loan for the son, and actually owns the car).
The creditor may seek relief from the court on the co-debtor automatic stay. This is done through a motion to remove the automatic stay. In a motion, there is usually a court hearing to provide due process to the parties. When the bankruptcy case closes, a creditor cannot go after the person who filed bankruptcy personally, but can go after the assets securing the debt and any co-debtor not in bankruptcy.
Contact an experienced New York bankruptcy attorney if for questions on debt.