Chapter 13 Protects You Longer and More Strongly from Your Secured Creditors
June 1, 2015
The “automatic stay” is in effect for years, enabling the tools of Chapter 13 to work, while the “co-debtor stay” protects your co-signers.
My last blog post started by explained how filing a Chapter 7 “straight bankruptcy” would temporarily or permanently prevent your secured creditors from taking your collateral. Chapter 13 “adjustment of debts” can do this sometimes so much better, in three ways:
1. Protection of the Collateral Lasts So Much Longer: Chapter 7’s “automatic stay”—the law that prevents your creditors from repossessing or foreclosing whatever secures their debts—generally lasts only about 3 to 4 months, the time between the filing of the case and the bankruptcy court’s discharge of your debts. In fact this protection may not last even that long if a creditor asks the court for, and the court grants, “relief from stay”—permission to start or resume chasing the collateral. Chapter 7 may only put a pause to the action against you and the collateral.
In contrast, a Chapter 13 case itself lasts usually 3 to 5 years. The protection of the “automatic stay” is often in effect that entire time, again unless a creditor asks for and the court grants it “relief from stay.”
Whether or not a creditor asks for “relief from stay” in the first place can largely depend on how your Chapter 13 payment plan proposes to treat that creditor and deal with the collateral. If you and your attorney follow legal requirements the creditor may have no grounds for objecting. For example, if the law allows you to reduce how much you pay on a vehicle loan based on the vehicle being worth less than the amount owed on it (a procedure called “cramdown”) and the reduced amount you are proposing to pay is based on a reasonable valuation of the vehicle, the creditor would likely not have any grounds to object and so probably wouldn’t.
Whether a creditor asks for “relief from stay” also turns on how well you actually fulfill the terms of your proposed plan as to that creditor. If you don’t make the payments as your plan says you intend to, understandably the creditor is going to want permission to repossess its collateral.
Even if what you propose in the Chapter 13 plan is reasonable and you make payments on it appropriately, the creditor may file a motion asking for “relief from stay” just to force some concessions from you. The creditor may want larger monthly payments to pay off a debt faster, or may want conditions on the “automatic stay” protection in case you fail to make payments, as a way to induce you to make the payments as you propose.
2. Long Protection Allows the Other Chapter 13 Powers to Work: Chapter 13 gives you many strong powers for dealing with secured creditors, many of which only work because of the long and continuous protection provided by the “automatic stay.”
One set of powers involves giving time to catch up on certain debts like home mortgages and vehicle loans. Unlike Chapter 7 which provides no mechanism for catching up on such debts (other than possibly making arrangements directly with the creditors), Chapter 13 essentially gives you the entire length of the 3-to-5-year case to catch up. You are only able to have this much time because throughout this period the “automatic stay” prevents the creditor from repossessing or foreclosing.
Another set of powers under Chapter 13 gives you time to pay off a secured debt at a reduced amount, such as with a “cramdown” of a vehicle loan (mentioned above). With “cramdown” your monthly payments are usually reduced from what the contract with the vehicle lender would have required. But the creditor can’t do anything about it because of the ongoing protection of the “automatic stay.” Also, the portion of the vehicle debt you aren’t paying is not discharged (legally written off) until the very end of your case. Bu as long as you are following the rules, because of the “automatic stay” the lender usually can’t do much in the meantime and has to just wait to see if you fulfill the terms of the “cramdown.” If you do so, you get your vehicle free and clear often for thousands of dollars less than you would have otherwise, without having to worry about having it be repossessed in the meantime because of the ongoing “automatic stay.”
3. The “Co-Debtor Stay”: A Chapter 7 case does nothing to stop a creditor from pursuing a co-signer or the co-signer’s collateral. But Chapter 13 can protect your co-signer. The “co-debtor stay,” available only under Chapter 13, immediately protects the co-signer from creditor action the moment you file your case.
Just like with the “automatic stay,” a creditor can ask for “relief from the co-debtor stay” to get permission to go after the co-signer or its collateral. Unless and until this motion is filed and the bankruptcy court says otherwise, your co-signer is fully protected. In your Chapter 13 plan you can favor the co-signed debt, such as by arranging to pay it in full over the course of your case, while paying less (and sometimes little or nothing) to most of your other debts. If your plan so provides, that usually prevents the creditor from being able to get permission to pursue your co-signer or any collateral.
Overall, the “co-debtor stay” gives you the power to protect your co-signers immediately and potentially for the long run, where Chapter 7 would provide no such help at all.