I recently received a very specific bankruptcy related question from an individual looking to move, but being held back due to a recent automobile purchase. This potential bankruptcy filer recently purchased a vehicle. To purchase the vehicle, they were required to obtain a co-signer; which they did. After making one payment towards the loan and putting a lot of miles on the car, they decided to move to another city in which they won’t need a car and won’t be able to afford to park one. So after all the trouble to purchase the vehicle, they need to unload it fast. Due to the amount of miles they quickly put on the car, they owe more than it’s worth so selling it isn’t an option. They’re leaning towards bankruptcy, but are wondering if this is possible and if so, if they would be able to avoid hurting the co-signer’s credit. Bankruptcy, auto loans and cosigners, oh my! This is the exact scenario making up the nightmares of cosigners everywhere.
Most would find the type of behavior described in this situation as annoying at best and irresponsible bordering on unethical at worst. But the fact of the matter is, they’re seeking bankruptcy advice so I’ll try to give it without getting personal.
The major issue here is the cosigner. Many would simply put the fault in them for agreeing to cosign. The individual filing for bankruptcy seems to be acting in his or her own best interests. They are attempting to do what is best for their own future and their own career. The cosigner is liable for the loan. That is the entire purpose of cosigning. And that is the exact reason why I always tell anyone who is considering it to NEVER cosign for anyone – even your spouse. The cosigner gets almost no benefit from the transaction and 100% of the liability.
If you file for bankruptcy, your liability for the car loan will be eliminated, but when this happens, the cosigner will be 100% liable. They can (and will) be sued by the lender within months of the default on payment. The vehicle will be repossessed by the lender, they will sell it and then they will sue the cosigner for the difference between what the loan was and the sale price of the vehicle. That’s simply how it works.
Other options you can consider if you do not want to file bankruptcy and leave the cosigner holding all the liability for the vehicle purchase are:
- Continue to make your monthly payment
- Contact the cosigner and see if they want to take over the note and keep the vehicle.
- Contact the lender to see if you are able to sublease the vehicle.
- Sell the vehicle for less than it’s worth and then sign an unsecured note with the lender to pay the difference (the cosigner would have to agree and be the cosigner on the new note as well).
The options are limited, but there are a few. If your situation calls for bankruptcy or you simply have additional questions regarding bankruptcy and the protection it can offer, please get in touch with the southern California bankruptcy attorneys at Westgate Law.