The Advantage of Co-Debtor Relief From Stay For Student Loan Creditors

Most know that the second a student or cosigner to an education-related obligation files a petition for bankruptcy relief, an automatic stay goes into effect. And, most also know that all collection efforts and communication must cease. But, do you know that in Chapter 13 bankruptcies there is an additional stay, the co-debtor stay?

The co-debtor stay imposes a stay against any acts to collect against a non-filing co-debtor. The stay applies to consumer debt,  including student loans, tuition, and other education receivables.  The reasoning behind the co-debtor stay is to protect the liable party from the pressures of the co-signer or the creditor for payment.

Because student loans and other education-related debts are generally not dischargeable in Bankruptcy , bankrupt individuals attempted to pay them as a “special class” of unsecured creditors at a higher rate than other unsecured creditors, such as credit card issuers.  However, courts largely abolished this practice because a Chapter 13 Bankruptcy repayment plan is prohibited from discriminating unfairly against any class of unsecured creditors.  If a bankruptcy plan favored student loan debt, the other unsecured creditors would be unfairly treated because they would receive a lower dividend payment.

As a result, student loans and other education-related debts must be paid the same dividend as all other unsecured debt in a Chapter 13 plan.  This dividend paid on unsecured claims is often 10% or less and plans may last as long as five years.  The educational institution or lender may see little or no payment on its claim while the bankruptcy case pends.

If there is a non-filing co-debtor, the co-debtor stay applies.  Unless the educational institution or lender obtains relief from the co-debtor stay, it cannot collect from the co-debtor during the Chapter 13 Bankruptcy.

There are normally two grounds available to educational institutions for relief from the co-debtor stay.  The first is that the non-filing individual “received the consideration for the claim held by such creditor.”  This means the co-debtor is the student who used the loan proceeds or attended the institution and the lender or institution may request the co-debtor stay be lifted to collect directly from the student.

Second, if the student files bankruptcy, and the plan does not propose to pay the obligation in full , the lender or educational institution may seek co-debtor relief to pursue the co-debtor for the amount the plan does not propose to pay. 

Additionally, there is also an equitable argument for co-debtor relief.  The debtor is going to emerge from Chapter 13 Bankruptcy and remain liable for the student loans and other education-related debts.  If interest is accruing on the obligation, it is likely that the amount due will be greater after the Chapter 13 case ends than before the case was filed.  As a result, it may be in the bankrupt party's best interest for the lender or the educational institution to collect from the co-debtor while the case is pending to prevent this. 

When a person with student loans and other education-related debt files a Chapter 13 Bankruptcy, it is important to check for a non-filing co-signer and assess whether obtaining co-debtor relief would be instrumental to collection of the debt during the bankruptcy.

Sources:
11 U.S.C. §1301
11 U.S.C. §1301(c)(1)
11 U.S.C. §1301 (c)(2)
11 U.S.C. § 523(A)(8)