What Happens to me When my Friend Files Bankruptcy?
Posted by Mark Martella on Thu, Aug 02, 2012 @ 10:15 AM
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.
What is The Automatic Stay?
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”.
Friend or Family Member filed for Chapter 7 Bankruptcy
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.
Section 1301(a) of the Bankruptcy Code
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, you may be subject to the rent for the balance of the ten year lease.
Don’t Be Stuck holding the Bankruptcy Burden
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.
Contact a Professional Bankruptcy Attorney
If you have co-signed for a loan as we described in this article and have questions or concerns, please do not hesitate to contact us to answer your bankruptcy questions.