When a debtor files Chapter 13 bankruptcy the automatic stay protection is extended to cover co-debtors of consumer debts. Consumer debts include those “incurred by an individual primarily for a personal, family, or household purpose” such as credit card debts , car loans, mortgages, payday loans etc. However, the bankruptcy code does not define tax debt as a consumer debt. This means that if there is a co-debtor on state or federal tax debt, they will not receive automatic stay protection when the filing party is in Chapter 13 bankruptcy.
Let’s take a closer look at this issue:
What Is A Co-Debtor?
A co-debtor is an additional party who is responsible for paying a debt. For example, if a married couple purchased a home and they are both on the mortgage contract, then they are both responsible for the mortgage payment. If one of them files bankruptcy, the non-filing party is considered the co-debtor.
How Does Bankruptcy Treat Co-Debtors?
In Chapter 7 bankruptcy , co-debtors receive no special protection. This means that once the bankruptcy is filed by one party, the creditor has the right to go after the co-debtor who did not file bankruptcy. However, in Chapter 13 bankruptcy, the co-debtor is protected until after the case is closed. This means that a creditor cannot go after the co-debtor for payment while one party is in Chapter 13 bankruptcy.
How Are IRS Debts Treated Differently?
If a co-debtor owes tax debt which was included in the Chapter 13 bankruptcy, they are still at risk for collections activity. The taxing authority has the right to go after the non-filing co-debtor while the Chapter 13 bankruptcy proceeds.