One of the many invaluable benefits of filing a Chapter 13 bankruptcy is what’s referred to commonly as the “Cosigner Stay”. From my experience, not many of my Chapter 13 clients realize when their case is filed that the cosigners on many of their debts are also protected from creditor collection. 

Chapter 13 federal bankruptcy law protects individual cosignors on consumer debts where applicable.  So, in the common situation where you have a cosigner on your mortgage, car payment, credit card, and personal loans – the filing of your Chapter 13 bankruptcy often prevents and stops any collection activity by these creditors against your cosigner.   The protection begins as soon as the case is filed, and lasts as long as the case is open and running.  Cosigner protection will stop however if the bankruptcy court grants relief from the stay. 

Two basic requirements must be met for the Cosigner Stay to apply:
 
First, the “stay”, or protection created by the filing of the Chapter 13 bankruptcy, does not apply to all types of debt.  The debt must be what’s called and classified as a “consumer” debt. In all instances, car payments, credit cards, and personal loans fall into this definition and the cosigners on these debts will always be protected. Tax debts and debts for professional services, such as attorney fees are not considered consumer debts and therefore won’t receive Chapter 13 cosigner protection. Depending on where you live (more specifically, what jurisdiction your Chapter 13 is filed in) will determine whether your mortgage debt is considered a “consumer” debt and whether the Cosigner Stay applies.

The second requirement that must be met is that the cosigner must be an “individual”. This simply means businesses or business entities do not qualify for cosigner protection. 

Keep in mind that cosigner protection stops and ends if the bankruptcy court, in favor of the creditor, grants relief from the stay, or the Chapter 13 is closed, dismissed, or converted to another bankruptcy chapter.  The Cosigner Stay applies only to Chapter 13 bankruptcies and never to Chapter 7 or Chapter 11 bankruptcies. 

Click here for more information on the Cosigner Stay or to speak with an experienced bankruptcy attorney.

Attorney Andrew Partridge
BankruptcyHQ.com

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850,912 – That’s the number of personal and business bankruptcy filings in 2007. When put in context of a nation of 300 million people operating thousands of businesses, that might not seem like a large number. But, when measured versus 2006, that is a 38% increase. I find this very interesting because wasn’t it not too long ago that the Feds enacted some bankruptcy reform legislation which was intended to stem the tidal wave of mainly personal bankruptcy filings in the USA?

We’ve heard this story before from the Federal government regarding the alarming rise in consumer bankruptcy filings and the need to legislate a way out of it. Late in 2005 they did legislate their way out of it with the . In all fairness the bankruptcy filing rate did decline following this legislation from previous years, but primarily due to the rush in filing the 2005 law change incited. However, probably just about the time the Feds were conjuring up this new bankruptcy reform legislation, did you notice how hot the housing market was in the USA? It was smoking hot around that time. Rates were low, inventories were high, sellers were selling and the buyer’s buying. But the Feds were making it more difficult for the American consumer to file bankruptcy. I’ve read that some in the Congress today are considering pushing more bankruptcy reform legislation to help with the current sub-prime crisis. I find that very interesting.

The housing market is not so hot these days. Bankruptcy filing rates are predicted to rise by staggering rates the next year or so. Foreclosures are at all time highs. Ordinary folks cannot keep up with their mortgage payments and even worse, many properties are losing value. People’s equity in their homes is less than what is owed on their loans these days. That is not a good situation to be in. Those consumers who were duped into loans too large for their budget have every right to be livid with both the greed driven lenders who perpetrated these shams, and the government for being too lax on the regulations. People, many people, have and are going to continue to lose their homes because of this crisis. The bottom line is, the economic situation is grim and bankruptcy is an option for many people to help with tough times. Before the Feds make it more difficult for you to file, consider speaking with an attorney today.

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Tax refunds are generally considered to be assets and can be taken by the bankruptcy trustee and distributed to your creditors. However, in many States it is possible to exempt all or a portion of the refund and protect it from your creditors. The Earned Income Credit portion of your refund can also be completely exempted in some States.

Another strategy often to protect your income tax refund is to “spend-down” your refund on necessities prior to the filing of the bankruptcy. Since the money is spent, it is no longer considered an asset, and the purchase of necessities generally does not create any new assets. But be careful, some states take a pro-rated portion of your income tax refund as a matter of practice and you'd find yourself owing the trustee even if you spent down your refund on necessities.

In Chapter 13 bankruptcies, some jurisdictions require that you turn over a portion of your income tax refund each year. In other jurisdictions, you are allowed to keep your income tax refund each year.

As you can see, the laws in each state do vary significantly in this area of bankruptcy law, so be sure to consult with a bankruptcy attorney familiar with the local laws before receiving your refund. Bankruptcy Laws in Your State

Many bankruptcy attorneys often see a large rush in filings during the 1st Quarter, when people receive their tax refunds and are able to pay their bankruptcy attorneys to get their cases filed. This is a legitimate way to spend-down the refund and a good way to pay for a bankruptcy filing. I expect that the anticipated economic aid package that will give most working Americans between $600 and $1200 will also cause a boost in bankruptcy filings.

- Richard J. Waple
http://www.bankruptcyhq.com 

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