What Happens to my Co-Signor if I Default on My Car Loan?
If you don’t have an established credit history or perhaps a blemished credit score, a car financing company may require that you have a co-signer. This means that the co-signer takes on the risk for the loan in the event that you default on the payments. The purpose for a co-signor is to give the creditor has an additional party to pursue for the debt.
If you have defaulted or anticipate that a default is eminent, call us for a free consultation before the situation worsens or your begin affecting your co-signers credit. We are strictly a debt resolution law firm and our licensed attorneys are dedicated to helping Michigan’s families find financial peace of mind and a path to long term success. Call us today at 866-261-8282 or schedule an appointment online.
If Your Car Loan is in Default, What are Your Options for Resolution?
If you default on a car loan, your lender will eventually pursue a vehicle repossession. How quickly this happens depends on a number of factors. If you wish to keep the vehicle, it is important to take action before it is sold at auction.
Once the vehicle is sold at auction, the lender can pursue both you and your co-signor for the deficiency debt – the difference between what you owed on the vehicle less the auction sale price plus any cost associated with the sale, interest and late charges, etc. The lender can also pursue a judgment and eventual garnishment to collect on the debt.
A default damages both your credit as well as your co-signers. Judgments, if renewed, can go on virtually forever until the debt is satisfied. Garnishments can severely impact your budget by taking 25% of your net paycheck or cleaning out your checking account. So it is important to consider the implications before you lose your vehicle.
File Chapter 13 Bankruptcy: Keep Your Vehicle, Establish Better Payment Terms & Protect Your Co-Signer
If you are in default or have experienced a repossession of your vehicle, take action by filing a Chapter 13 reorganization plan. This puts an immediate, and legal, stop to any creditor action, most importantly you vehicle financier. In addition to protection from a vehicle repossession, the Chapter 13 reorganization may provide many other distinct benefits, including:
- Reduced vehicle payment by extending the financing terms anywhere from 36 – 60 months;
- 0% interest on repayment of mortgage arrearages;
- If you have a high interest rate, we can reduce the terms to a “reasonable” rate, often times cutting rates by more then half the previous rate;
- If you have owned the vehicle for over 2.5 years, we can actually reduce the amount that you owe. Reducing the secured claim to the current fair market value of the vehicle versus the actual balance of the loan;
- Credit protection for both you and your co-signer. If the vehicle payments are made through the Chapter 13 debt consolidation plan, your consistent, timely payments will re-establish your credit score and protect your co-signer from the negative credit implications of defaulted payments.
In addition to protecting your vehicle ownership, the Chapter 13 provides other benefits for your budget, such as:
- Protection from home foreclosure;
- Removal of a second mortgage or home equity loan;
- 0% interest repayment on all unsecured debt, such as credit cards and medical bills;
- Opportunity to eliminate the remaining balance on unsecured debt that your were not able to pay with your “best efforts” during the 36 – 60 month repayment plan;
- Improved credit score through timely payments to your creditors and a reduced debt-to-income ratio – both of the above factors account for 65% of your credit score according to FICO.
Resolution Options if You Can No Longer Afford to Make the Vehicle Payments:
If you can no longer afford to make the vehicle payments, here are various options:
- Turn the vehicle over to your co-signer to maintain payments;
- Pros: Credit is preserved for both you and your co-signer.
- Cons: Your co-signer might not want the vehicle or have room in their budget to make the payments.
- File a Chapter 7 bankruptcy to eliminate the vehicle debt.
- Pros: You can make a fresh start by eliminating debt obligation for the vehicle as well as all other unsecured debt.
- Cons: This does not eliminate your co-signers obligation for the vehicle. They are now 100% responsible for 100% of the vehicle debt.
- Settle the debt for both you and your cosigner if the lender agrees to a reasonable settlement.
- Pros: This is a non-bankruptcy option that could satisfy the debt for both you and your cosigner.
- Cons: Debt settlements usually require a one-time lump sum payment to the creditor in order for the financier to consider accepting a reduced amount. If you can’t make the current payments, it is unlikely that you have the money to make a settlement payment and your cosigner would have to make up the shortfall.
Get Debt Resolution
As you can see, there are many considerations for you and your cosigner. We encourage you to call our firm for a free consultation to explore all of your available debt resolutions options. For over a decade, our firm has dedicated our practice to helping our clients find lasting debt relief and improved credit.
We offer both same day appointments and legal protection if you are facing an immediate creditor action. Call us today at 866-261-8282 to schedule an appointment for a free consultation over the phone or at one of our six Michigan office locations: Detroit, Southfield, Flint, Ann Arbor, Warren or Dearborn.