No matter which chapter of bankruptcy you choose, Chapter 7 or Chapter 13, as soon as you file, an automatic stay kicks in that stops debt collection efforts. The automatic stay is designed to keep creditors off your back while the Trustee evaluates your petition and verifies what you can afford to pay. With a Chapter 7, the stay will last until you receive your discharge. After that, you should be in good shape because your eligible debts will be evacuated and any surviving debts will be easier to deal with. With a Chapter 13, the stay will last the length of your repayment plan so long as you keep up with your payments. But in either case, how does this affect your co-debtors, co-signers or spouse?
When the automatic stay protects co-debtors
If you and your spouse signed on for debt together, but you don't file a joint bankruptcy petition, they will be treated as any other co-signer or co-debtor. A co-signer or a co-debtor is simply someone that shares a debt with you, whether it's your significant other you're married to or not, a parent, friend or someone else. You may have taken a loan and they co-signed to help you get approved or get a better rate or you may have signed for someone else to get a debt. Either way, you are co-debtors.
If your co-debtor is your spouse and you file a joint bankruptcy, the automatic stay will cover you both in either a Chapter 7 or a Chapter 13. If you file Chapter 13, the automatic stay will protect your co-debtors including a spouse that didn't jointly file bankruptcy with you. This applies for all consumer debt (i.e. non-business debts). The automatic stay will continue throughout your repayment plan but if there are any remaining balances that are discharged, your co-debtor may be pursued for the rest.
When the automatic stay does not protect your co-debtors
In a Chapter 7, your co-debtors are not protected at all. For instance, if you have a co-signed credit card, the card issuer will very likely turn around and pursue your co-signer once they learn you are off limits. In a Chapter 13, as mentioned above, any co-signed debts that you receive a discharge for and that have remaining balances, will likely result in your co-signer being pursued. While this may be upsetting, this should not keep you from filing bankruptcy if it is your best option to get the debt relief you need.
When bankruptcy is still the best option, even if you have co-debtors
If you have a significant amount of unsecured debt you cannot service and are in over your head, bankruptcy may be the best approach to get you a financial fresh start. Even though this is best for you, knowing that your co-debtors can still be pursued for the debt may be a stumbling block for you. You may feel it is unfair to leave them holding the bag, particularly if they signed on for a debt for you, rather than vice-versa.
But consider this. While it is contrary to bankruptcy law to make personal payments prior to filing, it's not contrary to do so afterward. What this means is that if you and a co-debtor are both on a credit card that you owe $2,000 on, if you paid them $700 prior to filing Chapter 7, that's a no-no. But, if you file Chapter 7 and get a discharge that frees you up financially, you may then be able to afford to make payments to your co-debtor to cover the payments they are making on your debt.
However, what you don't want to do is to resume paying directly to the creditor. In the credit card scenario, if you and a co-debtor have a shared credit card debt, and you pay directly to the card issuer after bankruptcy, you can actually reinstate your debt that was discharged. Instead, let the co-debtor make the payments and then you reimburse them for what they paid.
This is the best case scenario for a Chapter 7 – where you get the fresh start you need and alleviate any feelings of guilt over your co-debtor being stuck with debt. With a Chapter 13, let the repayment plan play out, get your discharge, then help your co-debtor deal with any residual debt.