A co-signed debt is when you are both on a debt and usually both on the title.
SHOULD I CO-SIGN FOR MY SON, DAUGHTER, SPOUSE, FRIEND, BOYFRIEND OR GIRLFRIEND?
NO! If their credit is bad, they probably did not pay their debts. Do not feel guilty. They are not going to pay this bill either! We see a lot of parents, grandparents, ex-boyfriends/ girlfriends, aunts, uncles and co-workers forced into a Chapter 7 or Chapter 13 Bankruptcy because they co-signed on a car or other debt for a friend or relative and the debt was not paid. When the co-signer does not pay the debt, the creditor will look to you for payment. Sometimes, they will look to you after they have already repossessed the collateral.
WHAT HAPPENS WHEN A CO-SIGNER FILES BANKRUPTCY?
When a co-signer files for Chapter 7 Bankruptcy and surrenders the co-signed property to the creditor, the person who signed on the debt (who did not file bankruptcy) can step in a pay off the collateral (car, truck, computer etc.) and keep the item. But if you are both on the title, you both have the right to use the item (even if you did not pay for it). The co-signer (who did not file bankruptcy) can do nothing. The creditor will repossess the item, sell it and (usually) try to collect the deficiency (which is the amount owed to the creditor after costs of sale and payments are credited) from the person who did not file bankruptcy.
EX: $20,000 (car financed) – $12,000 (paid on car) = $8,000 (balance due)
$8,000 + $1,500 (cost of sale) – $7,000 (received at sale)= $2,500 (balance owed on loan)
The deficiency balance will still run interest. They can garnish wages, levy on checking/savings accounts, etc. to collect the money. This sometimes forces the person, who is current on their bills, to file a bankruptcy to stop the collection efforts.
CAN BANKRUPTCY HELP ME WITH A CO-SIGNING DEBT?
Chapter 13 Bankruptcy can help. You can keep the car or truck and make repayment on the debt. If you want to protect the co-signer, you will need to pay the contract rate of interest. The contract rate of interest can run from 0% to 27% and is determined by the original contract signed at the time the vehicle was purchased.
If you do not protect the co-signer, the creditor will usually obtain relief from the Co-Debtor Stay. This relief allows the creditor to sue and otherwise pursue the non bankruptcy filer for the difference in interest and value received under the Chapter 13 Bankruptcy. Remember, the bankruptcy attorney does not represent the co-signer.
For more information call 615-399-3800 and schedule a free appointment with us! In person or on the phone in our Nashville or Clarksville offices!