 Borrowing
for another invites bad credit
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 Dear
Bankruptcy Adviser,
I am presently very heavy in debt (more than $100,000). My problem
is really not credit card debt which is approximately 30 percent
of my total debt. I extended my credit to others by co-signing an
auto loan and have also obtained four other vehicle loans for another
person in my name, which are now being defaulted on. I also have
my own car and pay for one of the four vehicle loans when I can.
I am considering bankruptcy at this point because although I am
not behind on my credit cards I do not have the resources to catch
up on the other past due auto loans. I have contacted Consumer Credit
Counseling Services and they suggested assisting with my credit
cards, but that would not help with the auto loans. I am current
on my car but have other obligations that I have to take care of
(I have two young children and no financial support for them). Should
I seek the advice of an attorney at this point?
-- Candace
 Dear
Candace,
I'm not going to waste any time here. You are in some hot water,
and it's only going to get hotter. As I write these words, all five
of the dealers who granted you loans will soon be in a race to the
courthouse, each seeking to be the first one to get a judgment against
you so that they can garnish your wages or levy your bank accounts.
Also, each of the five cars is likely to be repossessed, and soon.
Now, Candace, let me be perfectly honest. Some
of this is your fault. Some of this is not. I'm imagining that
you're an overly generous person and that, like a moth to a flame,
some unscrupulous people have been drawn to your financial naivete.
I apologize if that sounds a little harsh, but you are in trouble,
and my goal here is to help you to understand two things: One, there
is a problem, a big problem, and it's been a problem for a long
time, and two, immediate action is required on your part before
the situation gets worse.
Here's what I think happened: You had good credit
and took out a car loan. Then, someone else approached you, let's
say his name is Joe, and Joe effectively said, "I've got good
income but bad credit. How about if you sign for these loans
and I'll make the payments?" You agreed to this, not knowing
that it's a horrible idea -- and here's the really important part
-- from my experience with this type of issue, so did the car dealer. In
many cases, the dealer, who, by law, cannot use another person's
income to qualify you for a loan, pretended that your income was
equal to your income plus Joe's, used your credit score and qualified
you for the loan. Otherwise, there is no way that a person such
as you, who cannot pay off $30,000 in unsecured credit card debt,
would qualify for five auto loans. According to the Bankrate
auto loan calculator, if you borrowed $70,000 for five years
at 7 percent, your monthly car payments would be about $1,400 per
month.
The problem is that now Joe's defaulted on his promise
to pay and you, Candace, are legally responsible for all of these
loans. What's probably going to happen is that all of the cars
will be repossessed and sold. This will not erase your debt,
because they will likely be sold for less than you currently owe.
What's left is called the "deficiency." You will
be responsible for paying these deficiencies as well as your credit
card debt, and with two young children and no other support, it's
time to take action.
To make matters worse, you might not be able to erase all the
debt in a bankruptcy. While Chapter 7 is preferable because then
all your debt will be erased, the lender will scrutinize your income
listed in the bankruptcy petition because you qualified for five
loans and now are defaulting on four of them. If the lender's legal
department decides to challenge your bankruptcy, then you could
be forced to pay back some of the deficiency balance. However, from
my experience, the lender's legal department knows the practice
occurs and will not challenge your bankruptcy.
I wholeheartedly recommend talking to an attorney.
At this point, you might be liable for fraud, but you might also
be a fraud victim. The lender needs to be notified of this situation
and you might need to file fraud affidavits. These affidavits will
not absolve you of liability, but they will indicate that you were
an innocent victim. Furthermore, if you do file bankruptcy, the
fraud affidavits will show the trustee assigned to your case that
you were a victim and not the perpetrator of a crime.
Candace, co-signing
for another person's debt is one of the most financially irresponsible
things you can do. As you've found out, you don't get to drive
the car AND you get stuck with the bill. However, you had some
help. If I'm right about your situation, these car dealers and "Joe"
did you some bad deeds, and you should be careful of them in the
future.
Justin Harelik is a practicing attorney in Los
Angeles. To ask a question of the Bankruptcy Adviser, go to the
"Ask the Experts" page
and select "bankruptcy" as the topic.
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