In most instances the Bank may proceed to enforce its guaranty against the guarantor if the borrower files bankruptcy. If a guarantor files bankruptcy, collection efforts are halted by the automatic stay. If the borrower files under Chapter 13 of the Bankruptcy Code the “codebtor stay” prohibits the Bank from attempting to collect the consumer debt of the borrower/debtor from an individual co-borrower/debtor (i.e., the guarantor) unless (i) the individual became liable on or secured the debt in the ordinary course of his business or (ii) the case is closed, dismissed or converted to a Chapter 7 or 11 bankruptcy proceeding.
Corporate bankruptcy issues are discussed in “Upstream Guaranties,” “Side-Stream Guaranties” and “Cross-Stream Guaranties.”