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Columns: Bankruptcy Adviser
Justin Harelik   Expert: Justin Harelik
Bankruptcy Adviser
Elderly co-signer's risks in son's bankruptcy case
Bankruptcy Adviser

When mom is stuck with debt
 

Dear Bankruptcy Adviser,
My mom co-signed a car loan for me six months ago. I have to file bankruptcy soon. What will happen to her during my bankruptcy? She owns no property and is 72 and poor.
-- Sean

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Dear Sean,
In my line of work, we refer to clients like your mother as "judgment-proof." The finance company likely will not bother suing your mother and getting a judgment when she has no property, limited income and is over 65 years old.

This is not a guarantee that the company will not sue her. In fact, she must be very careful if she does get sued because her bank accounts can be levied -- even if she gets Social Security and even if those funds are protected from judgments. The bank is not obligated to determine the status of funds in an account.

However, this does not mean that she is harassment-proof. Quite the opposite actually. The finance company (or subsequent collection agency) will call her at all times of the day and make her feel like a bad person. Often, the collection agencies will employ outrageous tactics to convince her to pay this account.

I know people might read this column and claim that I am advocating bankruptcy and telling people to skirt their legal obligations. I guess in some sense, I am. Unfortunately, the issue is not the fact that your mom owes the money; it is simply the impossibility of her ever being able to afford to pay it back. I would love to see some sort of federal credit counseling program that protects debtors from lawsuits and harassment, but also establishes a viable means to pay back debt.

The fact is that people want to pay back the debts they owe. If there is one thing that the new bankruptcy laws have proven, it is that those opposed to the laws were correct -- the vast majority of people file bankruptcy for one of three reasons: loss of employment or significant downturn in income; insurmountable medical bills or divorce. Sometimes people face combinations of these issues.

People that want to pay back their debts cannot do so at the terms demanded by the creditors. While I understand that the creditor does not want to wait five or 10 years to be paid back, the debtor usually can afford only so much.

In your mother's case, she needs to protect her bank account. The creditor might sue her, get a judgment and try to levy it. She will either need to live on cash for the time being or risk the unexpected depletion of her bank account with limited warning. And this will put even more pressure on you and your family. Sit down with her and explain these options, then let her decide how to proceed.

Bankrate.com's corrections policy -- Posted: July 29, 2008
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