|
Dear Bankruptcy Adviser,
I'm a single mom bringing home $1,400 a month. I've been advised not to file bankruptcy, but I have $10,000 in
credit card debt and I co-signed for a friend who had the car repossessed. Should I file bankruptcy, or is there
another option?
-- Kim
Dear Kim,
You are right to be very confused about the advice you received. Whether it was from an attorney or from a
friend, you are in a potentially explosive situation.
While $10,000 in credit card debt is not outrageous, it probably is impossible for you to pay
on your current salary. You are likely paying only the minimum payment. And even if you have some credit available,
eventually, you will reach the tipping point when you no longer have available credit and you can barely afford
the minimum payments.
I would be more concerned about the repossessed vehicle than your credit card debt. Once the car
is repossessed, the lender will sell the vehicle, probably for less than the balance remaining on the loan --
leaving a deficiency balance.
A deficiency balance is the difference
between what is still owed on the car loan after
the car has been sold. For example, if the lender
sold the car for $5,000 after repossessing it,
but $8,000 was owed on the loan, then a $3,000
deficiency remains. Because you co-signed, the lender
likely will sue you before suing your friend.
Car lenders are not obligated to go after the driver first. The lender typically will pursue the
co-signer because that person's credit made the loan possible in the first place. Many clients who co-signed on
car loans have asked me why he or she was sued first. I always say that the lender has no obligation to sue one
party before suing the other.
I wish I had a simple answer for you, one that could resolve this issue without further complications.
However, I do not. While I can assume you will qualify for bankruptcy because of your income, I cannot say whether
bankruptcy is better than working out a payment plan with your creditors.
You may be able to enter into a
credit counseling program in which you pay off
the $10,000 in debt, interest free, over the next
three years to five years. However, credit counseling
agencies typically do not handle deficiency balances.
This will force you to make a monthly payment
on the deficiency balance outside of any payment
plan with the credit counselor. In most cases,
this proves to be impossible because the payment
required to satisfy the car lender might be too
high for you to afford.
|
