Most New York bankruptcies are either in Chapter 7 or Chapter 13. The two chapters provide benefits and drawbacks to petitioners, which means there are good reasons to file in one chapter and not another. For example, if you borrow money to buy a car, have a relative co-sign on the loan, and then run into financial troubles, filing a Chapter 7 bankruptcy might not do you much good. The lender will simply enforce payment by the relative, and this is without discussing repossession of the vehicle, exempting it, or signing a reaffirmation agreement. Filing in Chapter 13, though, might actually resolve the situation in your favor.
Why? Because Chapter 13 of the bankruptcy code (Title 11, Section 1301) creates a “co-signer’s automatic stay” that forbids creditors from enforcing payment on loan from someone other than the petitioner who happens to have co-signed the loan. In terms of the example above, the lender would be barred from pursuing payment from the relative who co-signed your auto loan. If it does so, you as the petitioner can file a lawsuit against the lender for violating the stay. The co-signer cannot initiate the suit, but he or she can join yours. Chapter 13 creates the “co-signer’s automatic stay” to ensure that the lender cannot obtain more from the petitioner than is allowed under the resulting repayment plan.
The Chapter 13 “co-signer’s automatic stay” has a few exceptions. If the petitioner gave something to the co-signer, then the lender can obtain that from the co-signer. Obviously, if the petitioner’s bankruptcy is closed or converted to a Chapter 7 or Chapter 11 case, the co-signer loses the benefits of the stay. Finally, but most importantly, if the Chapter 13 repayment plan does not cover the full amount owed on the loan, then the lender can recover the remainder from the co-signer. Remember, the purpose of the extra protection is to ensure the bank doesn’t obtain a windfall from the petitioner’s Chapter 13 filing by accepting payments from the petitioner’s repayment plan and then collecting the full balance of the loan from the co-signer.
Thus, if you have a loan that a friend or family member co-signed for, and you’ve run into financial difficulties, filing in Chapter 13 might be to your advantage. It’s small complications like these that make hiring an experienced bankruptcy attorney worthwhile.
For more questions about co-signed loans, bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Chapter 13 bankruptcy lawyer Brooklyn NY Bruce Weiner for a free initial consultation.