The Seventh Circuit narrowly interpreted Section 1301(a) to prevent the co-debtor stay from becoming the functional equivalent of an automatic stay protecting a non-bankrupt spouse.
Section 1301(a) bars a creditor from collecting a “consumer debt of the debtor” from anyone who is liable on or secured the debt. As Circuit Judge Joel M. Flaum said in his Dec. 22 opinion, the co-debtor stay was enacted “to head off undue pressure that creditors could otherwise exert on the debtor by threatening action against third parties – often relatives – who have co-signed the debtor’s debts.”
The case involved a wife who filed a chapter 13 petition. While the debtor was making payments under her plan, a credit card lender got a judgment against her non-bankrupt husband but never attempted to enforce the judgment.
The debtor-wife sued the lender for violating the co-debtor stay, relying on several theories as well as Wisconsin law. The bankruptcy court ruled on summary judgment in favor of the debtor. On appeal, the district court reversed.
The debtor’s best argument was based on a Wisconsin statute providing that debts incurred during marriage are presumed incurred “in the interest of the marriage or the family.” Consequently, an obligation incurred “in the interest of the marriage” can be satisfied either from the debtor’s individual property or from marital property.
Since the credit card lender theoretically could have attempted to satisfy the judgment against marital property, the debtor-wife contended there was a violation of the co-debtor stay by entry of the judgment.
Judge Flaum upheld the district court, concluding that Wisconsin law did not make the credit card debt a “debt of the debtor,” because the automatic stay in Section 362(a) would not have allowed the lender to collect the debt from marital property. (Fear of violating the automatic stay may explain why the lender did not attempt to collect the judgment.)
Judge Flaum buttressed his conclusion by citation to Wisconsin law, which provides that the state’s marital laws do not give rise to direct liability by a non-incurring spouse.
Several other theories espoused by the debtor also failed to pass muster. Judge Flaum rejected an argument that the statutory phrase “debt of the debtor” should be interpreted to mean “liability on a claim against the debtor,” employing the Bankruptcy Code’s definitions of “debt” and “claim.”
Judge Flaum noted that Congress itself used “claim against the debtor” — in Section 362(a)(1), for instance. Using the terms in different contexts in the Bankruptcy Code means that Congress did not intend for them to have the same interpretations.