Seventh Circuit Ruling Against Debtor in Recent Bankruptcy Case
In a recent decision from the Seventh Circuit Court of Appeals—which includes residents of Oak Park, Illinois—the court ruled in favor of a bank as opposed to the debtor who had filed for consumer bankruptcy protection. More specifically, the case concerns the co-debtor stay and whether a spouse (who has not filed for bankruptcy protection) can benefit from the co-debtor stay in certain situations involving the other spouse’s application for bankruptcy protection. To better understand the implications of the case, we would like to take a closer look at the facts and to discuss the Seventh Circuit’s holding.
Facts of the Case in Smith v. Capital One Bank
The case at issue here is Smith v. Capital One Bank (2016). The facts of the case, according to the court, are as follows:
A debtor, Karen Smith, filed for Chapter 13 bankruptcy back in 2011. Before she filed for bankruptcy, her husband applied for and obtained a Capital One credit card, which he “used for consumer debts for the Smith family.” When Karen Smith filed for personal bankruptcy, her husband did not join in the bankruptcy petition, and she did not list him as a co-debtor in her application for Chapter 13 bankruptcy. In bankruptcy court, Karen Smith’s Chapter 13 plan was confirmed.
However, in July 2014—during Karen Smith’s repayment period as part of her Chapter 13 plan—Capital One filed a lawsuit against Smith’s husband in relation to debts owed on his Capital One credit card. The bank won the lawsuit in state court. In response, Karen Smith argued in bankruptcy court that, under the co-debtor stay of 11 U.S.C. Section 1301(a), as well as other relevant laws including the Fair Debt Collection Practices Act (FDCPA), her husband should be consider a co-debtor in connection with her Chapter 13 bankruptcy, and as such Capital One should not be permitted to attempt collections on the credit card debt.
The bankruptcy court in Karen Smith’s claim agreed with her, and held that the Capital One credit card debt initiated by Smith’s husband was subject to the co-debtor stay. However, the district court disagreed.
Analysis of the Case
As the Seventh Circuit explains, the bank “sought and obtained leave for an interlocutory appeal to the district court.” In its decision, the district court determined that “the husband’s credit card debt was not Smith’s consumer debt, [and] reversed the bankruptcy court.” Specifically, it explained that “consumer debt of the debtor . . . does not include a debt for which a debtor is not personally liable but that may be satisfied from the debtor’s interest in marital property.”
The “stay of action against codebtor” under 11 U.S.C. Section 1301 states that, after a debtor’s Chapter 13 bankruptcy plan has been confirmed, “a creditor may not act, or commence or continue any civil action, to collect all or any part of a consumer debt of the debtor from any individual that is liable on such debt with the debtor.”
As such, the primary issue for the Seventh Circuit was whether the husband’s debts on the credit card should be considered the debts of Karen Smith (inasmuch as they were debts of the Smith family), or whether they should be considered debts only of Smith’s husband. The Seventh Circuit ultimately ruled that, because Karen Smith did “not demonstrate that her husband’s credit card debt is her own, the co-debtor stay does not apply.”
Contact an Oak Park Bankruptcy Lawyer
The case could impact future bankruptcy proceedings, particularly in cases involving married couples. In the meantime, if you have questions about filing for personal bankruptcy, an experienced bankruptcy attorney in Oak Park can speak with you today. Contact the Emerson Law Firm for more information.
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