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Am I liable when a co-debtor files bankruptcy on a debt we both signed for?

Serving Families Throughout Mobile

Co-debtor liability can create confusion in situations where one debtor files a bankruptcy case and the other debtor does not. If the co-debtor files a Chapter 13 bankruptcy case, there is what's called a " co-debtor Stay" imposed against the creditor so that they cannot collect on the co-debtor personally. They can, however, repossess collateral and sell it if there is a default in payment on the loan. If the co-debtor filed Chapter 7 case, there is no "co-debtor" stay in that type of case.

In the context of the chapter 13 matter referenced above, the creditor could resume collection on the debt personally ( meaning: seek a personal judgment) against the co-debtor who did not file bankruptcy, since the non-filer did not pay the claim or receive a Discharge from the Bankruptcy Court. If the co-debtor bankruptcy case filing was Chapter 7, the creditor can obtain a relief from stay order, repossess the collateral and sue the co-debtor personally.

When a client mentions that a loan is a "business loan," we generally lean on assuming the loan is both business and personal in nature since most small business lenders require a personal guaranty on the loan. If the loan is strictly a business loan properly signed for by the officer of a corporation or LLC, then it is legally possible that the business entity is completely separate from the bankruptcy process, meaning the shareholders of the corporation or members of the LLC would not be personally liable for the debt. The corporation or LLC, however, can be found liable for a debt incurred solely by the business.

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