Don't co-sign a loan while in Chapter 13 bankruptcy
You shouldn't consider it and your trustee won't let you anyway
By Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
I am from New Jersey and currently going through
Chapter 13 bankruptcy (month two of 60). My long-term
boyfriend (not a partner legally through a civil union or other recognition)
is recently employed and requires a car for transportation to and from work.
His credit is less than stellar, and he cannot receive
financial help from his family to secure a $4,500
loan for a car. Can I co-sign a loan for him? I realize that I am not an
appealing debtor, but I make an adequate
salary for both of us ($120,000/year). Any suggestions?
Chapter 13 bankruptcy bankruptcy is
a unique kind of legal protection. With it, you get to satisfy some of your
creditors through the court, pay or discharge other types of debt and keep all
of your assets in the process. Like a credit counseling agency repayment plan,
it's in effect for three to five years.
In exchange for the
ability to walk away from at least a portion of your unsecured liabilities
while also keeping valuable property (that you might have had to give up in a
Chapter 7 bankruptcy), you do lose a few freedoms. These include having to send
money that you get from raises, bonuses and inheritances to your creditors so
they receive the maximum amount, and not applying for any new loans or credit
cards unless authorized by your court-appointed trustee.
As I'm sure you know by
now, you are paying that trustee to oversee your case. The trustee's role is to make sure
that you adhere to the rules so you don't abuse the system, but are also able
to live without too much trouble.
So let's get to that car.
You and your boyfriend are a couple and as such should function as a unit. That
means a certain amount of shared expenses. I get that he needs a car to get him
to and from his new job, but what I don't get is the automatic assumption that
you ought to take out a loan to buy it. Here is why I think you shouldn't:
- He has bad credit. Even in the best of circumstances I rarely recommend co-signing a loan. Doing so with someone who has already proven himself to be a
poor credit risk? Not a chance.
- You have bad credit. Normally a co-signing arrangement would work out because one
person is guarantying the loan or line of credit with his excellent credit
history. In your case, neither of you are gold in a lender's eyes. Therefore,
if you did get financing, the deal would be miserable.
- Your trustee would think it's a bad arrangement. Remember the trustee's role as the gatekeeper? The trustee will
assess your request and make a determination. I doubt you'll get a thumbs
up. The new loan would mean new payments -- and your income is already promised
to old debts.
Happily, you have a
better option. You are both employed and from my vantage point, making decent
cash. One quick look at online vehicle sales websites indicates an abundance of
cars on the market, starting at just a couple of thousand bucks. I think you
and your partner should buy one with funds you can scrape together in a month
or two. A glamorous ride it may not be, but if the goal is to transport him
from point A to point B, that shouldn't be a problem. He can get to his job and
other places, start a savings account, obtain a credit card in his name and
rebuild his credit rating.
Meanwhile you can
concentrate on completing the Chapter 13. When it's done, you too would be wise
to take the slow but steady road to economic security: Save and invest. Borrow
and repay. Work together to create a healthy, happy home.
See related: Can you apply for credit after Chapter 13 bankruptcy?, The risks you incur when you co-sign
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Send your question to Erica.
Published: May 30, 2012
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