Will chapter 7 or 13 bankruptcy affect your cosigner? In the past week I have had consultations with two different people concerning the same issue from opposite sides. The problem involves cosigning. One is a young man who has had some difficulty over the past years with buying and keeping cars. The other was a parent who cosigned for an adult child. In both instances a parent signed for a child who could not get the car on their own. In both instances the child became a casualty of the economy and is no longer employed. In neither case is the parent able to come up with the cash to pay the debt, or to even make monthly payments.
It is very common for lenders to require someone else to get in on the pain when one does not have good enough credit. When you sign on the dotted line, without fail, the loan rep will tell you that the applicant is the “primary” and the other is the “secondary”. People always come in and the first thing they say is, “I am the secondary.” When you sign with someone else for a loan it goes by a number of names: cosigner, co-maker, or in bankruptcy court, co-debtor. There is no such thing as a primary or a secondary. These are just terms of art they use to get the one with better credit to hop on board. When you cosign you are taking on the whole loan. What the rep says is meaningless. The contract is what sets forth your roles. No one ever reads that!
Bad Option 1: Do nothing
This option is the most common. The person with the asset, let’s call it a car, falls behind on his payments. It may be a job issue, or it might be something else. After about 5 months and lots of calls from the loan company, they give up and call the towing company. You don’t want to appear weak to Mom or Dad, so you say nothing even though they cosigned. The car gets repoed. You aren’t worried because you owe $15,000 and the car is worth $14,000. You can cover the $1,000.00. They take the car to the auction and sell it for $1,000.00. That leaves a deficiency balance on the note of $14,000.00, with interest still running. You get a letter. They want the whole thing now. What makes matters worse, Mom and Dad also get a letter. The loan company doesn’t care where the money comes from, they want paid, NOW. You don’t have the money and neither do your parents. When a law firm gets involved they go after whoever has the most assets. You guessed it, Mom and Dad.
Worse Option 2: File a Chapter 7 Bankruptcy
File chapter 7 bankruptcy. This is usually the first thing you think of. If you can just discharge the debt then they can’t come after anyone for payment. That is only half right. There is no codebtor stay in a Chapter 7. In your bankruptcy petition you list the car loan company. You also have to report Mom and Dad as codebtors, and schedule them because you now owe them money as well. In the bankruptcy Statement of Financial Affairs you report the repo. What happens? The car loan company and Mom and Dad are discharged. You don’t owe any of them money anymore for this loan. Mom and Dad are still on the hook to the car loan people for $14,000. Imagine, Thanksgiving dinner. In the unlikely event you are even invited, what a great time you will have. The only way a chapter 7 bankruptcy will help Mom and Dad is if they file it. File chapter 7 bankruptcy only if you don’t want to ever speak with your cosigner again!
Best Option 3: File a Chapter 13 Bankruptcy
In this scenario the best bet will be a chapter 13 bankruptcy. The problem here is that you will have to have a job with regular pay. The court considers this as something that will last more than 6 months. Unemployment won’t cut it. When you file a chapter 13 there is a codebtor stay. You can keep the wolves away from your parents, for now. Your plan will have to fully pay the amount your parents could be on the hook for. Otherwise, the loan company will get an order allowing them to chase Mom and Dad for the amount you aren’t paying them. There might be some possibility of challenging the amount of the debt because they sold the car for so little, but don’t bet on it. A chapter 13 is a debt repayment plan. You will have to stay in it for 3 to 5 years. If you screw this up and the case is dismissed for nonpayment, Mom and Dad are on the hook again.
Is there an answer to Cosigning?
I have never seen a situation where cosigning a loan is a good deal for the person asked to do it. Of course as parents we want to see our children grow and leave the nest. We want the best for them. Nothing in the parenting book says anything about Junior having the best, sportiest wheels. Look back a minute. Who helped you get started? Were your first cars used? Mine were. If you absolutely have to sign, here are some suggestions:
- Have the statements mailed to you, nip a problem in the bud
- Assume that you will be paying the loan
- Only do it if you can afford the monthly payment, or
- You have enough savings in reserve to pay off the debt if the worst happens
- If you have enough savings buy Junior a good, serviceable used car.