It happens all the time. A family member has poor credit, but needs to buy a car. The down payment and interest rate proposed by the car lender is much more than he can afford to pay. The car dealership tells him that if he finds a co-signer for the car loan with good credit, he could greatly reduce his down payment and interest rate. So, you get a call on a Saturday afternoon: “Can you come down to the dealership and help me out by co-signing?” “I have a good job,” he says, and “I’m good for it.” Well, being the good family member you are, and having perfect credit, which you are very proud of, you drive down to the dealership and sign on the dotted line.
Two years later, you are awakened by a process server on a Sunday morning who serves you with a lawsuit because your family member failed to pay the car loan. The car was repossessed and there is still a balance due on the loan—a very big one. You say to yourself, “How can the car lender sue me? He was the one who was supposed to make the payments!” Welcome to the Law School of Hard Knocks.
Generally, you are liable for 100% for the loan that you co-signed, including attorney’s fees, collection costs and auction fees. Unfortunately, you can’t just get away with paying half of the balance due (although you can sue your co-debtor for a contribution, but good luck with that). Even if your family member manages to settle the debt, you could have negative tax consequences if the lender issues a 1099 Form for the forgiven debt (it gets counted as being income to you). To top it off, your perfect credit has now been destroyed.
Although there are technical legal requirements the lenders must follow, such as the FTC Credit Practices Rule that requires a Notice to Cosigners, generally lenders have the paperwork down to a science, and there is little room to wiggle out of the loan.
The question is, what can you do now? Well, the first thing you have to do is stop the lawsuit. One very efficient way of doing that is by filing for bankruptcy and gaining the protection of the “automatic stay,” which stops all collection attempts, including lawsuits, from moving forward. If you qualify for a Chapter 7 bankruptcy, you may be able to discharge your personal obligation to repay the debt without having to make any payments at all. Or, if your income is higher than the average income for people in your state and you do not qualify for Chapter 7 relief, you may still qualify for a Chapter 13 bankruptcy, and enter into a reasonable repayment and reorganization plan, and prevent the creditor from garnishing your wages or zing your bank accounts.
If you are considering filing for bankruptcy, or have been sued on a loan that you co-signed, you will need an experienced attorney to evaluate your case. The firm of Laura Margulies & Associates, LLC has successfully handled thousands of cases in Maryland and Washington, D.C., many involving unique or novel issues. Please contact us today for a consultation at (301) 816-1600. Our website address is: www.law-margulies.com.