You
may be asking yourself: “Why should I care when my friend files for
bankruptcy?” Well, if you are like many
of my clients, friends and associates, you have a big heart. At some time in the past, especially in some
of the difficult financial times your friends may have gone through recently,
they may have come to you for some assistance in co-signing for a car loan or
on a credit card. You agreed to it because
you knew the person for a long time and that they are a good person and would
pay their debts. Unfortunately, as much
as your friend fully intended for you not to have any responsibility for the
loan and it was only a technicality, the reality is, if they have no job and
cannot make the payments, when the choice is between paying for a credit card
or buying medicine for their children, the credit card does not get paid. Now, this favor that you provided to your
friend or, more commonly a family member such as a parent co-signing for a
child, turns into a nightmare. We often
see the situation of a parent co-signing on anything from a credit card to a
mortgage loan for their children and then being faced with a huge liability.
One
of the most powerful tools in the Bankruptcy Code is the Automatic Stay. The Automatic Stay means that upon the filing
of a bankruptcy petition by an individual, any parties attempting to collect a
debt such as a credit card company or a mortgage company must stop. If they fail to stop their collection efforts
they can be held in contempt of court and sanctioned. However, certain secured creditors such as a
mortgage company or a vehicle lender, can proceed with their collection efforts
against the collateral if they file a motion with the court requesting that the
Stay be lifted for the limited purpose of pursuing the collateral, but not a deficiency from the debtor. However, from your prospective, if your good
buddy stopped making payments on the credit card, you may have already received
phone calls and letters prior to his filing for bankruptcy. The question then becomes: “Are you protected
by your friend’s bankruptcy filing and the protection afforded by the Automatic
Stay?” As with most cases in the law,
the answer is: “it depends”.
If
your friend or family member has filed for a Chapter 7 bankruptcy, the
Automatic Stay does not apply to you
as a co-debtor. Therefore, a credit card
company can continue to pursue you for collection of that debt. However, if your friend filed a Chapter 13
Bankruptcy, which provides for repayment to creditors, then you may be
protected by the Automatic Stay provision.
Specifically,
pursuant to Section 1301(a) of the Bankruptcy Code, if you are liable on a debt
with your friend and it is a consumer
debt, the Automatic Stay applies to you as well and the creditor may not
pursue you for collection of that debt.
However, your friend must also agree in his Chapter 13 Plan to pay the claim in full. If he does not agree to pay the claim in
full, then the creditor could pursue you for the amount that your friend is not
agreeing to pay. Also, it must be a
consumer related debt. Therefore, if you
co-signed for a lease on a commercial property for your friend’s new tattoo
parlor in Sarasota or Port Charlotte, you may be subject to the rent for the balance of the ten year
lease.
Hopefully,
you will never have to face this issue.
However, the lesson to be learned from this is that if you want to help
out a friend or family member, it is important to get a full financial
disclosure just as if you were a bank lending to this person. As hard as it may be to say “no” to a
lifelong friend or your son or daughter, in the end, you may learn the meaning
of the phrase: “no good deed goes unpunished”,
and be stuck holding the bag, while they are discharged from any further
liability.
If
you have co-signed for a loan as we described in this article and have
questions or concerns, please do not hesitate to call on us to answer your
questions.
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