Car loan co-signer gets socked with costs

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Dear Debt Adviser,
I am in collections on a loan I co-signed for an automobile. The car has been repossessed and the collection agency is saying I still owe $14,000. Since the loan was secured by the automobile and they have repossessed the car already, am I still responsible for this debt? If so, can I file bankruptcy on this debt? If I cannot pay what the collection service is demanding, what are my options? Thanks.
— Diane

Dear Diane,
Talk about being taken for a ride! In my estimation, co-signing is one of the most dangerous financial actions a person can take. It is dangerous because you are risking your credit, money and relationship with the borrower, all at the same time.

Typically, what happens is a friend or relative tries to get a loan from a lending professional. The professional who does this for a living says the borrower is too risky to lend money to, even if the loan is secured by an asset like car. So the borrower gets an amateur (that’s you) with an emotional attachment to override the good sense of the lender and promise to repay the loan when (not usually “if”) the other person defaults.

In most auto repossessions, the car is sold at a dealer’s wholesale auction after the repossession for less than retail market value and almost always for less than what is owed on the loan. Yes, the vehicle is the security for the loan and that is why the car was repossessed.

The lender is assured that it will receive at least a portion of the money owed for the car after it is sold at auction. However, you signed a contract promising that you would repay the full amount of the loan. Therefore, the balance of the loan plus fees associated with late payments, interest, repossession, sales and typically attorneys’ fees are all still owed. The fact that these fees can be added to the loan balance is usually included in the fine print of the contract.

Due to the way your letter is worded, I am assuming that the original owner of the car for whom you co-signed is not willing or able to help you pay the debt. If there is even the slightest possibility, I would recommend that you go visit your ex-friend as soon as possible to explore that option if you have not already. Some small good news is that without a car, he or she should be nearby and relatively easy to find.

Here are my answers to your questions in order. Yes, you are responsible for the debt, which will grow every month from fees and interest. Yes, you can file for a Chapter 7 bankruptcy on this debt. But, as my mother used to say, “You can, but may you?” You may not if you have previously filed in the last eight years or if you fail a means income test. Generally, I’d say that $14,000 would not merit a bankruptcy that will ruin your credit, possibly raise your insurance rates and maybe hurt your job or promotion prospects in the future.

To weigh the pluses and minuses, I recommend that you contact an attorney who specializes in bankruptcy or debt collections. Your attorney can let you know all your options for dealing with the collection agency and determine if an agreement can be reached with the collector for a monthly payment amount that you can afford. Before you agree to a repayment plan, make sure you have reviewed your finances and are offering a monthly payment that you can actually consistently pay.

Finally, you will need to visit with a credit counseling agency for pre-bankruptcy counseling and obtain a certificate, which is now a requirement to file for bankruptcy. Check the U.S. Trustee’s Web site for a credit counseling agency that is approved for the judicial district where you would be filing for bankruptcy.

I can’t help but wonder if they were talking about car loan co-signing when they said that the road to Hades is paved with good intentions.

Good luck!

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