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Background:

My friend Abe co-signed an auto loan for about $25k with his "friend" Bella, in the USA state of Maryland, about 4-5 months ago. The car was for Bella's use. The deal was that Bella would make payments on the car and when it was paid off she would keep the car. All contracts between Abe and Bella were verbal, handshake-only. Bella and Abe are both on the title application, with Bella as the primary. The paperwork was completed and sent to the Maryland Motor Vehicle Administration (MVA), the auto loan was approved based on Abe's credit, and the car was driven off by Bella. For reasons I don't understand neither the title, nor the registration, nor permanent plates were ever issued. When Abe asked the Motor Vehicle Administration why, they simply stated there was an "insurance violation" with no further explanation.

Of course, Bella made no payments and the car will soon be assigned for repossession. It appears Bella intends to keep the car until someone takes it away from her. All attempts at reason have failed. She is hiding the car to prevent Abe or the repo man from grabbing it. The only thing left is to wait for the car to get repossessed (hopefully quickly, but Bella is a veteran criminal), sold at auction, and see what the final debt is.

Question:

Because the car will end up being involuntarily repossessed, Abe will have a black mark on his credit for 7 years, or so I'm told. Abe has about $4k in credit card debt to add to the $10-$15K or more of losses on the car fiasco. He has only about $2k in cash, about $20k in an IRA, probably $2-$3k in equity in his condo, and no other real assets. Should Abe just go into Chapter 7? He'll already have a repo on his credit, how much worse can bankruptcy be?

Abe owns a condo and has always paid his mortgage on-time. He has some money in a retirement IRA. His income is about $40k, of which about $12k is SSA disability. Abe has already accepted that he'll be unable to get any credit for a long time.

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    @TTT I find it credible. It's from the interest, penalties, fees, and considerable repo costs from a car-holder who is evading. – Harper - Reinstate Monica Jan 23 at 4:21
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    @TTT Oh, all those costs get passed onto the debtors. And that's when they find out that the prefix "co-" means "equal/partner" not auxiliary or subordinate... I wonder what throws people on that... the co-pilot having 3 bars instead of 4? And yes, Abe could step up and buy the car out at any moment (and could make that conditional on a credit report clear). But in Abe's current situation there's no money for that, and then Abe would have the problem of the car being absconded with... – Harper - Reinstate Monica Jan 23 at 4:34
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    Did Abe report the car as stolen to the police? If he doesn't know where it is and has a legal right to it, that might be the way to go, voluntarily surrendering it before it gets to repo stage would save some as they are entitled to deduct repo fees from the value they get for the vehicle before applying the difference to what you owe. – Hart CO Jan 23 at 15:09
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    @HartCO: The car is not stolen. Barring a court saying otherwise, both Abe and Bella are equally entitled to the car. Their relative rights to the vehicle seems to be an entirely civil matter, not criminal. If Abe goes to the cops and says Bella stole the car, the cops will look the car up and see that Bella and Abe are on at least the title application. That will be the end of the matter as far as they're concerned. – President James Moveon Polk Jan 23 at 16:47
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    @JamesReinstateMonicaPolk My point was that it might get the car located. All Abe knows is that nobody can find the car he jointly owns and Bella is either not talking or doesn't know where the car is either. – Hart CO Jan 23 at 17:02
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DON'T talk to the creditor. DON'T trash your other good credit. DON'T declare bankruptcy for a good while.

The IRA is protected. Protect it.

First and foremost, the IRA is untouchable in MD. Creditors cannot touch it. Bankruptcy cannot touch it. Abe must not touch it. The IRA is a sort of "trust account", and Abe, as a "trustee", must protect that from misspending (by Abe).

The penalty for failing as your own trustee is 10% - and since the money wasn't taxed before, it's taxed now both Federal and State. In short, a fool cashing out an IRA in a panic will lose 50% to taxes -- and worse, there won't be withholding, so the 50% will come as a Huge Surprise on April 15 of the next year.

But that is the fate of fools. Abe must take care not to be one.

It's not as severe as you think. Don't make it worse.

Right off the bat keep your other credit relationships tip-top. Pay all your minimum payments on-time etc. Keep the fire isolated to one place.

Having ONE bad mark from ONE creditor is not the end of the world for your credit report. The 7 years is already counting down because it started at the R9. And it represents one dispute with one vendor. A bankruptcy is much worse. It means a total financial meltdown, and it's 10 years - not from the R9 but the final disposition of the bankruptcy a year from now. So it's really 11 years and hasn't even started yet.

Declaring bankruptcy because of one bad mark would be like a gifted chess player losing three games in a row, and then rage-quitting chess.

The one thing bankruptcy will do - and weak minds enjoy this - is make the defaulted creditor bother you less. In theory. And that's no guarantee. That's not much of a benefit compared to the heinous cost of it. You can throw away their letters for free. You can tell them to shag off on the phone, for free. You don't need bankruptcy for that.

However. Abe is able to effectively use the spectre of bankruptcy like a "Fleet in being", having the very real effect of deterring the creditor on the fear that Abe always could declare bankruptcy. Abe gets to use this "chilling effect" to full force.

DO NOT TALK TO THE CREDITOR

Nothing good can come of it, and only bad. They are extremely good at manipulating people. Say nothing except "stop calling" And. Hang. Up. Anything you say can and will be used against you... well in theory negotiations are excluded, but you have to do everything right to make that happen, and they're really good at tricking you into blowing it.

I get where the creditor call can feel like a scab you just gotta pick. Don't.

Oh, but they might sue me!

No, that's not gonna happen.

Assuming you've been candid about Abe's assets, the first thing the creditor will do -- pre-lawsuit -- is do an asset search on Abe. They're going to see an Abe with virtually no attachable assets.

See, here's the thing. When you sue someone, it costs typically $5000+, so you better be likely to recover significantly more than that. And you have to assume the defendant will do everything possible to defend. You might get to the very end of the lawsuit (verdict) and boom! The Defendant declares bankruptcy, undoing all your work! Oh no! So you must plan for that outcome and make sure the defendant has, say, $10,000 of assets beyond that which is protected in bankruptcy by MD law. And MD law protects plenty! $25k of home equity, disability benefits and judgments, insurance payouts, public benefits, IRAs of course, $5000 in clothing, books, and tools of trade, $1000 in appliances, burial plot, and a $6000 wildcard on top of that! Abe is completely protected.

Oh, and legal warchest too. The court wants you to pay your lawyer, and treats your own lawyer as a priority debt. It's not like they'll clawback money from your lawyer to pay other creditors, nor would plaintiff's lawyer ask for that (as a professional courtesy).

So a lawsuit would be an utterly futile gesture. And they know it. And they won't sue.

In the meantime, Abe should cut costs and save up.

Leave the IRA alone. Don't rush to pay down the existing credit card (keep paying minimums on-time, obviously). Cut costs hard, and save up a cash war-chest. (you should have 6-9 months of emergency fund anyway, so this is just a fraction of that). I'd like to see Abe enter this thing with $5000 ready to go. That's the price of a clean exit.

In the meantime, Abe needs to get a thick skin about an infinite number of collection calls and letters, and never say anything except to shag off. They will come until below, and that's the cosmic punishment instead of bankruptcy.

Eventually, this happens.

A year or two goes by. Abe gets a lawyer to write up a contract. It says:

  • Abe was the innocent victim of a swindler.
  • The creditor gets $5000, in exchange for which, Abe is removed altogether from this matter.
  • There is a dispute over whether this is Abe's debt, or not. As such, no negative statements will be made by either party about the other, and in particular, no negative data will be reported to any credit reporting agency, with $10,000 liquidated damages for breach.
  • Abe never benefited from this debt, and as such, no 1099-C will be filed, nor will any income be reported to any agency.
  • Venue, jurisdiction, whole agreement, counterparts, blah blah.

One day, completely out of the blue, this offer shows up on the creditor's doorstep. The creditor is going to think they hit the lottery because up until now, this was a dead-dog uncollectible. They don't care about this other stuff. They care about the payday. Will they agree to that? Oh, you betcha.

You could probably have your lawyer haggle the number down. Whatever. The "No 1099-C / Clean the Credit Report" is a showstopper, and is good cause to sweeten the deal.

And Abe is out. Clean and clear.

Two months later, check the credit report. Clean and Spiff.

It will literally be as if it never happened. Well, except for the $5000, but that will be the ultimate price of the affair.

Oh noes! They sued anyway!

Then you declare ...

... that they are idiots. (Did you think I was going to say something else?)

Even if they know about the abovementioned $5000, even if that was somehow unshielded... Abe's lawyer has dibs on it. They can't argue with that.

So get in conference and you say "I'll spend my last dollar hiring my lawyer to make the most vigorous defense possible, bar none. And then, after verdict, I'll have my lawyer thwart all your collection actions. If you finally get a garnishment, I'll declare bankruptcy the next day, and all my assets are protected. OR, you can go for what's behind door #2. (and present the contract above).

That will be the end of that lawsuit.

Then there's the other lawsuit...

Abe would have a right-of-action against Bella, on two prongs. First, Abe can get a civil court order to hand over the car. (the inverse of a restraining order, compelling rather than prohibiting behavior). And if Bella refuses, the judge has the option to jail Bella indefinitely for civil contempt of court (which is a sanction, not a crime).

Second, Abe has the right to recover all losses and costs. However, all the friction we discussed above that protects Abe from creditors, has the same effect to protect Bella from Abe getting a useable recovery. So Bella would have to achieve some level of wealth before that target would have any fruit. Presumably that is not the case, if Bella is using romance to swindle cars.

Abe would have to file the suit before the relevant statute of limitations, but could spend some additional time trolling out the actual litigation, and then would have 10 years to collect, which is renewable. For what it's worth: If Abe can prove fraud/crime was involved, then Bella cannot wash this debt away in bankruptcy.

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    This seems very wise. Save bankruptcy as a last resort, only to be used if the plan somehow fails and the creditor goes to court and wins. If the creditor is rational they also understand that they won't win any money if a court victory forces Abe into a bankruptcy. I have two questions. You wrote "leave the balance on the credit cards". Did you mean make no payments at all, or make minimum payments? I also wonder, should we make the creditor aware of Abe's complete asset picture? Or is that pointless because they'll always assume Abe is hiding something? – President James Moveon Polk Jan 23 at 13:46
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    Ask a lawyer for proper phrasing for, "I'll spend my last dollar hiring my lawyer to make the most vigorous defense possible, bar none. And then, after verdict, I'll have my lawyer thwart all your collection actions. " Getting this phrasing wrong may hurt you during a bankruptcy hearing. – Brian Jan 23 at 14:57
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    @Brian it better not!! Things said in conference are privileged. – Harper - Reinstate Monica Jan 23 at 19:15
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    @JamesReinstateMonicaPolk make minimum payments until the $5k cash is built up. Not paying the minimum will create a new, entirely self-inflicted, black mark on Abe's credit. – Dan is Fiddling by Firelight Jan 23 at 19:37
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    @JamesReinstateMonicaPolk Like I said about "it's only one creditor" and not rage-qutting chess, yeah, you definitely want to keep your other credit relationships tip-top. Abandoning all credit is the mentality of someone who has decided on bankruptcy, and even that thinking is based on myth. I woudln't voluntarily disclose Abe's credit picture to the creditor first, because that would involve "talking to the creditor" and that is a mistake!! And second they wouldn't believe it anyway. – Harper - Reinstate Monica Jan 23 at 22:38

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