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Seventh Circuit Rejects Chapter 13 Debtor’s Application of the Co-Debtor Stay

The United States Seventh Circuit Court of Appeals recently published an opinion affirming a district court’s interlocutory ruling on a Chapter 13 bankruptcy debtor’s claim that the defendant violated the co-debtor stay of the bankruptcy code by obtaining a judgment against the debtor’s non-filing husband for credit card debts incurred in his name. The debtor had initially received a favorable judgment on her claim at the bankruptcy court, but the federal district court’s reversal of that decision will become final with this latest opinion, and she will be unable to prevent the defendant from collecting on their judgment against her husband.

Ten Dollar BillsThe debtor in the case of Smith v. Capital One Bank was a married woman who filed for bankruptcy in 2011 without her husband. Her Chapter 13 repayment plan was approved in 2012 and was in repayment through 2014, when the respondent, a credit card company, sought to collect an unpaid debt incurred by the debtor’s husband. The debtor sued the respondent and alleged a violation of the co-debtor stay by the credit card company’s attempt to collect the debt while her bankruptcy was in repayment and the automatic stays were in effect. The bankruptcy court agreed with the debtor, entering judgment in her favor and causing Capital One to appeal the decision to the district court.

The District Court and Seventh Circuit Decisions

Unlike the bankruptcy court, the federal district court and the Seventh Circuit did not find the petitioner’s arguments persuasive. The district court rejected the plaintiff’s attempts to shield her husband’s debts from collection with the co-debtor stay, citing the language of the federal code that only the debts “of the debtor” are stayed from collection, and a marital debt incurred after filing by a non-filing spouse with no evidence that it benefited the debtor is not considered to be a debt “of the debtor” under the statute. Therefore, these debts are not protected from collection.

The Automatic Stay Does Offer Valuable Protection

Although the debtor in the Smith case ultimately failed in applying the automatic co-debtor stay to prevent the collection of her husband’s debt in that case, the value of the automatic stays provided to bankruptcy debtors should not be underestimated. Once a bankruptcy is filed, creditors are automatically required to stop collection attempts and can be sanctioned if they refuse to comply. Obligations shared with non-filing spouses or business partners may also be protected from collection by the co-debtor stay or by reclassifying them as debt other than consumer debt.

Are You Considering Bankruptcy?

If you or a loved one is considering bankruptcy, you should not assume that all property will be subject to the bankruptcy’s requirements. A skilled bankruptcy attorney can advise you of the many stays and exemptions that may be applicable in your situation. Contact the experienced Louisville and Southern Indiana bankruptcy attorneys at the Schwartz Bankruptcy Law Center to help you get your finances back on the right track. Our knowledgeable and competent bankruptcy lawyers know that your financial situation may change with time, and we can prepare you for whatever might happen in your case. Get your financial freedom back by contacting us today. At the Schwartz Bankruptcy Law Center, we represent clients throughout the U.S. in all bankruptcy proceedings. Call 866-366-3328 or contact us through our website to schedule a risk-free consultation.

More Blog Posts:

Appeals Panel Upholds Dismissal of Pro Se Debtor’s Bankruptcy Case, Kentucky Bankruptcy Lawyers Blog, published December 2, 2016.

Appellate Panel Reverses Bankruptcy Court Ruling that Had Refused to Reopen Debtor’s Bankruptcy, Kentucky Bankruptcy Lawyers Blog, published December 28, 2016.

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