What is that you ask? It is someone who ?guarantees? (hence the derivative ?guarantor?) to pay for someone else?s debt should they default on their obligation. It is quite like a co-signer but normally applies to business debt.
As you know, businesses come and go as the days go by. It is quite easy to open and close a business; and as many credit card and loan companies understand this, they will often have the owner of the company personally sign as a guarantor on the loan. This protects the creditor should the business close; this way even if the business itself is not open, there is still a live body that obligated to pay them their monies owed.
The good news is that if you have signed as a personal guarantor on a business credit card or loan and the business has closed, should you file a bankruptcy, you can include that business debt as part of your personal debt to relieve your personal liability on the debt owed. If the business is still open then the creditor has every legal right to go after the business for the debt owed, but not you personally.
If you are currently in a Chapter 13 bankruptcy and want to purchase a new vehicle there are several things that must be done. The information below is extremely important to the success of you being able to get a new vehicle so read it very, very carefully. It is critical that you get the court’s permission before going and incurring any debt (loans) on your own. To make the process as clear as possible we have broken it up into five different steps.
Should you cosign on a debt for a friend or family?
Cosigning on a debt is almost never recommended. However, it’s a tough decision sometimes when you have friends or family that need you to cosign on a debt to receive the necessary loan. Typically, though, it’s not a good idea to cosign on a debt. Let’s find out why.
What is a cosigner?
When someone is trying to obtain financing and they do not have the FICO credit score necessary to receive financing on their own, the creditor may request someone else cosign on the debt to receive the desired financing. So what exactly does cosigning mean? If someone cosigns on a debt it means they are agreeing to be responsible for that debt if the original debtor is unable to pay it.
The problem is, if the person who originally needed the loan can no longer pay it then the creditor can go after the cosigner for the debt. The creditor has the same rights to go after the cosigner as they do the primary debtor. It is not uncommon at all to see a codebtor be sued for an uncollectable debt.
Lets take a look at an example:
Dana the daughter needs to get a new vehicle. Her old vehicle has broken down and without a new vehicle she cannot get to her minimum wage job. She goes to a car dealership and after sitting down to sign all of the final paperwork the finance director at the car dealership they tell her they cannot give her financing due to her low credit score. Dana had a repossession three years ago that appears on her credit. They tell her she will need to get a a cosigner to receive the necessary financing. Stressed and needing a vehicle Dana calls Molly, her mother, to explain the situation. Molly the mom wants the best for her daughter Dana and knows she has to have a vehicle. Dana promises her mom that she will make the payments. Hesitantly Molly cosigns on a car loan for $30,000.
Fast forward and a year later Dana has made all of the payments on the vehicle. Molly barely even remembers that she cosigned on the debt. Unfortunately though, Dana ends up losing her job and can no longer afford the monthly car payment. To ensure the car is not repossessed again Molly, Dana’s mother, agrees to make the payment until Dana gets a new job. Months and months pass by and Dana is unable to find a job. Molly has used her savings and even pulled from her retirement account to try to continue to make the payments. Eventually Dana’s moved back in with her mother and Molly has exhausted all of her savings and retirement funds and they get behind on the car. The financing company eventually repossesses the vehicle and sells it at an auction for $5,000. The problem is, they still owed $20,000 on the vehicle. The finance company then tried, unsuccessfully, to collect on the deficiency balance of $15,000. Because of that, they filed a lawsuit against both Dana and Molly and eventually place a lien on Molly’s house and add interest, late fees, penalties and attorney’s fees to the amount owed.
The creditor could potentially try to repossess Molly’s other vehicle (which is paid off), go after money in her bank accounts and even foreclose on her house (which has a lot of equity). As time passes the creditor continues to add extra fees to the amount that is owed. Eventually, Molly has to file bankruptcy because she owes on the deficiency on the vehicle that she cosigned on and owes a lot in taxes because she had to withdraw a lot from her retirement account.
So what have we learned?
Don’t cosign on a debt with someone else. The person needing a cosigner may have the best of intentions. In our example above, Dana certainly did not want her mother to go through the stress and worry of having creditors come after her. The reason a finance company requires a cosigner is because they believe there is a good chance the person seeking the financing won’t be able to make the necessary payments. If this were to happen, creditors don’t care that you cosigned just to help out. Instead, they will come after you as if you were the one who originally failed to make the payments.
When you obtain a loan, in most cases the lender does not want to just give you the money, they want to make sure that you have some sort of incentive to make sure you make your payments. What better incentive is there than taking away your property if you do not pay? Therefore, creditors normally want something as collateral to ensure you repay the money they lent you; they are taking a secured interest in your property and the debt you owe them is a secured debt.
There are many different cases of secured interest. You can go to a dealership and purchase a vehicle, the lender then has a secured interest, the car that you just purchased. If you decide to no longer keep making your car payment the lender can simply come and pick up or repossess the vehicle. Put it up for auction and recoup their money. You buy a home, for whatever reasons, you no longer make the payments, then the mortgage company is going to come and foreclose (take your home back) on your property. If you go to Best Buy and get a new TV, even though you don’t sit in their office and sign a promissory note like you do on your vehicle; that credit card you used to make the purchase acts the same. Best Buy still has a secured interest on their goods (the TV that you purchased). This is what’s called a purchase money security interest.
Most debts are unsecured debts. Meaning they do not have a security interest. Most credit cards, medical bills and personal loans are without you putting collateral up for the debt. However, you know a debt is secured if you have property the creditor can come and get if you do not pay the debt.
Companies have rights just as consumers do in order to protect themselves, when you purchase something whether it be a car, a home, jewelry or furniture, companies need to know they will recover the money due to them and, therefore, use collateral as a secured interest. If you cannot make the payments, they can recover the collateral and try to sell it to recover the amount they loaned you.
One of the most frequent calls we get at our office is, “What does it mean when it says, “charge off”? Do I need to list this in my list of creditor’s?” The answer is always “yes”!
As you are perfectly aware, once you owe a debt, the creditor will relentlessly try to collect the money that you owe them. Although certain laws govern how far they can go trying to collect a debt, we know they will call, send letters, then call again; day after day! After a certain amount of time (this will depend on the company policy and practices) after being unable to collect the debt the creditor is going to “charge off” your debt. This is done primarily for their tax purposes; they are telling the IRS that they have just chalked it up that you have no intention of paying off that debt. It’s a loss in their books for accounting purposes.
Does that mean that you no longer owe the debt? No! Just because they charged the debt off doesn’t wipe away the fact that you still owe that company money. They can charge your account off and still attempt to collect the debt. More likely, they can transfer or sell the debt to a collection agency for pennies on the dollar and the collection agency will then try to collect on the debt. There are companies that actually make a living off of buying “bad debt” and then trying to ruthlessly collect on that debt to make money.
Remember, a charge off is really just used for “book keeping” purposes; it has nothing to do with the fact you still owe money. If you are completing your bankruptcy, we strongly suggest you list all of your debts including those that state they have been “charged off”!