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Nondischargeable Co-Signed Debts

November 11th, 2019 at 8:00 am

Co-signed debts get tougher if your co-signer challenges the discharge of your obligation to him or her, or if the debt isn’t dischargeable. 

 

Last week we discussed obligations on co-signed debts, both to the joint creditor and to your co-signer. In that discussion we assumed that both those obligations could be discharged (written off) in bankruptcy. But what if the co-signer challenges your ability to discharge the debt? And what if the underlying debt can’t be discharged, such as a recent income tax? We address these two situations today.

Co-Signer Challenging Discharge

If you file bankruptcy any creditor can challenge your ability to discharge a debt. But creditors’ grounds for successfully doing so are narrow, so such challenges are rather rare. The creditor essentially has to prove that you committed fraud in incurring the debt. You must have misrepresented your intentions at the time the obligation was created.

How would this happen with a co-signer? Assume that you needed a co-signer to incur a debt. As that time you intended to pay the debt so that the co-signer would not need to pay it. But because of unforeseen circumstances—for example, you lost a job or got sick—you couldn’t pay it. Your co-signer is upset that he or she has to pay it. He or she is unhappy that you are discharging your obligation to pay the debt through bankruptcy. He or she is even more unhappy that you are discharging your obligation to pay back him or her for paying off the debt. So he or she files an objection to this discharge of your obligation to him or her.

Would the Challenge Be Successful?

That objection by your co-signer to the discharge of your obligation to him or her would not likely get anywhere. In fact, your co-signer would likely by advised by a lawyer not to waste money on such a groundless objection. That’s because at the time you incurred the obligation you committed no fraud or misrepresentation. You intended to pay the underlying debt so that your co-signer would not need to.

Your co-signer would only have grounds for a successful objection to discharge if the facts were different. Assume that you lied to your co-signer at the time you persuaded him or her to co-sign the debt. You said you had no other debts when you had many debts. Or you said your income was very reliable when you knew that it was not. Under these circumstances your co-signer could allege that you misrepresented the facts to induce him or her to co-sign the debt. If the bankruptcy judge is persuaded that this is what happened, your obligation to your co-signer would not get discharged and you’d have to pay him or her whatever amount he or she paid on the underlying debt.

Nondischargeable Co-Signed Debts

Now on to the other scenario, in which the underlying debt itself can’t be discharged in bankruptcy. Recall the example of a recent income tax debt. Assume that you filed joint income tax returns with your spouse last year and you jointly owe the IRS $3,000. Now you’re getting divorced. This $3,000 joint debt is too recent to be able to discharge in bankruptcy. So you are both fully liable on that tax. In fact, even if the divorce court decrees that one spouse must pay that tax, the IRS still considers both fully liable.  

Assume the divorce decree obligates you to pay this tax but you can’t afford to do so. You can’t discharge the tax obligation in bankruptcy. If you file a Chapter 7 “straight bankruptcy” case you also can’t discharge your separate obligation to your spouse created by the divorce decree for you to pay that tax instead of your spouse. So you need to make arrangements with the IRS to pay the tax. This would likely be in monthly installments, after discharging your other debts in your Chapter 7 case. You’d pay off the tax, and any additional interest and penalties.

This would be slightly different in a Chapter 13 “adjustment of debts” case. Again you can’t discharge the tax debt because it is too recent. However, under Chapter 13 you would be able to discharge your separate obligation to your spouse created by the divorce decree to pay all of the tax yourself. The practical difference? Under Chapter 13 you generally don’t have to pay ongoing interest and penalties. However, those would continue to accrue for your spouse, and he or she would likely be required to pay them. This would happen in spite of the divorce decree because bankruptcy law is stronger.

Possibly Nondischargeable Co-Signed Debts

The last scenario is a co-signed debt that could possibly be challenged as nondischargeable.

Assume you owe a business loan to a bank that you and a business partner co-signed. The business failed and you’re filing bankruptcy. Your now-former business partner has much more assets than you and is hoping to avoid filing. The bank is challenging your bankruptcy discharge of the business loan on the basis of some alleged misrepresentation. Assume also that your former partner has no grounds to challenge your separate obligation to him.

If you succeed in persuading the bankruptcy court that you made no misrepresentation in incurring the business loan, your obligation to the bank will be discharged, as will your separate obligation to your former partner. You will owe nothing to either the bank or your ex-partner.

If you do not succeed, the loan debt will not be discharged. You will continue owing the bank. If your former partner does not file bankruptcy or otherwise discharge the debt, you will both owe it. But assume also that you succeed in discharging your obligation to your former partner, since there made no misrepresentations to him or her. So your former partner cannot pursue you to pay the underlying debt. So if the bank forces him or her to pay the debt first, you won’t have to pay anything to the bank.

Conclusion

As you can see from these examples, protecting yourself when you owe co-signed debts can get complicated. Be sure to tell your bankruptcy lawyer about any possible joint obligations at your first meeting. It’s crucial to know what legal obligations you owe or do not owe to your co-signer(s). Then your bankruptcy lawyer can advise you how to best deal with them, together with your whole financial situation.

 

Concerns about Co-Signed Debts

November 4th, 2019 at 8:00 am

If you have a co-signed debt, you have two separate sets of concerns. Those having to do with your common creditor, and those with co-debtor. 


If you have a co-signed debt you tend to be more concerned about one of two sets of problems. You’re either mostly worried about the other co-signer, or about the creditor you’re both owe on the debt. It’s likely smart to be aware of both. Let’s start with concerns about the creditor.

Concerns about Your Joint Creditor

There’s a good chance you’re worried about the creditor you both owe because you’re having trouble paying the debt. This assumes that you are the one who is supposed to be paying the debt. The point of having a co-signer was to give you more incentive to pay the debt. The creditor has the right to make your co-signer pay the debt if you don’t. We’ll get into your options shortly.

What if you are not the one supposed to pay the debt? What the other co-signer is supposed to but is not doing so? You are obligated to pay a debt that you didn’t expect to pay. Especially if you were already financially challenged, this could push you over the edge. What can you do?

Protecting Yourself from Your Joint Creditor

Assume that the debt you owe is not legally secured by anything. The creditor does not have a right to take any personal property or real estate if you don’t pay the debt.

Assume also that it is not a special debt like income taxes, a student loan, a criminal debt or anything else that bankruptcy does not write off (“discharge”).

The first step in dealing with a co-signed debt is to find out your actual legal obligations on the debt. You may think you are completely liable on the debt when you really aren’t. Bring your bankruptcy lawyer any documents you may have on the debt (if any).

Even if you signed something related to the debt, your obligations may be different than you thought. For example, you might have signed something between you and the co-signer that didn’t in fact make you liable directly to the creditor itself.  The two of you may have assumed that there was joint liability when there actually isn’t. Or your liability may kick in only under certain circumstances. You don’t want to act without knowing these crucial details.

If you find out that you definitely owe the debt one option is to discharge that debt in bankruptcy. In a Chapter 7 “straight bankruptcy” you would likely not have to pay the debt at all. In a Chapter 13 “adjustment of debts” you would pay only as much as you could afford over usually a 3-year period of time. Often that would be only after paying other more important debts first. Either way, in the end you would likely no longer owe anything on the co-signed debt.

Concerns about Your Co-Signer

Concerns about your co-signer can get complicated.

Assume you learn that you are both fully legally liable on the debt. Again, is this a debt that you are supposed to pay or is your co-signer supposed to?

If your co-signer was supposed to pay it, do you have any way of enforcing this? In other words is there any documentation to back this up? Will he or she at least admit that it is his or her obligation? Assume you do have written and/or oral evidence that the co-signer was supposed to pay the debt. It’s still very difficult to enforce this obligation.

You need to discuss these facts with your bankruptcy lawyer to find out your legal AND practical options.

If instead you understand you were the one supposed to pay the debt, again you need to find out whether that’s legally true. Assuming it’s true, then you have two separate legal liabilities on the debt. The first is to the joint creditor. It can sue you to make you pay. We discussed how to deal with that above.

But you have a second separate legal obligation to your co-signer. He or she can also sue you if you do not pay the co-signed debt. How do you deal with him or her?

Protecting Yourself from Your Co-Signer

Assume again that the debt is neither legally secured by anything nor is it one bankruptcy does not discharge.

If you’re both liable on the debt the creditor is likely going to pursue both of you.  Your co-signer will likely demand that you pay. Then especially if your co-signer pays anything on the debt—voluntarily or not—he or she could sue you to repay him or her. To protect yourself from this separate liability to your co-signer, it may be worthwhile to discharge this separate legal obligation in bankruptcy. Chapter 7 and 13 would resolve with the debt as discussed above (about the debt to the joint creditor itself).

There’s a very important practical point about discharging your obligation to your co-signer. List both the creditor and your co-signer on your schedule of creditors in your bankruptcy case. Otherwise you could remain liable to your co-signer once your bankruptcy case is completed. That could happen even if you discharge the underlying joint debt. That does not erase your co-signer’s separate obligation to pay the debt to the creditor. So if you don’t list the co-signer and discharge your obligation to him or her, you could discharge the debt to the creditor and still be forced to pay the debt in full to your co-signer.

 

Forgotten Debts

April 22nd, 2019 at 7:00 am

What do you need to do, what efforts is worth taking, if there are debts you don’t have any records on or you’ve forgotten about?  

 

Several blog posts ago we introduced the law that debts “neither listed nor scheduled” risk not being forgiven in bankruptcy. Section 523(a)(3) of the Bankruptcy Code. This follows the bankruptcy principle that debts are forgiven—“discharged”—unless a debt fits within a specific exception. Debts “neither listed nor scheduled” is one of the exceptions.

Related to this exception to discharge we’ve recently looked at:

  • how to add a debt after filing your case that you didn’t originally list, and your timing for doing so
  • an exception to this discharge exception, that is, your unlisted creditor’s debt still being discharged if it still finds out about your case, and does so on time
  • debts sold or assigned to collection agencies

This leaves one last question for today about unlisted debts:

What do you do if you don’t know all of your debts because you’ve moved or lost track of them for any other reason?

This practical question gives us the opportunity to apply the principles we’ve been digging into these last few blog posts.

The Potential Consequences of Not Listing Debts

Start with the assumption that you will continue to owe any debt you don’t include in your bankruptcy debt schedules. Obviously, filing any kind of bankruptcy is a big deal. The discharge of debts is a legal right, but one that you can exercise very seldom. Hopefully it’s something you’ll only need once in your life. You want to do it right.

Chapter 7 “straight bankruptcy” generally takes about 4 months from start to finish. It costs pretty much the same in fees and damage to your credit whether you include all your creditors or miss one or two. You vastly increase its effective cost if afterwards you continue owing a debt or two that you could have discharged. Plus, instead of getting the peace of mind of a full fresh start, you’d be saddled with potentially avoidable debt.

Chapter 13 “adjustment of debts” involves a payment plan lumping together all your debts. Most unsecured creditors have to share out of a pool of money based on what you can afford to pay. That is often a small percent of what you owe, perhaps even 0%.  If you neglect to list a debt in your schedules, it can’t participate in your plan. So, instead of paying that debt the same percentage that you’re paying others, you’d have to pay it in full. Since all your money is earmarked for your other creditors, you’d have nothing to pay the unlisted creditor. So when it forced you to pay—such as by garnishing your paychecks—that would disable your Chapter 13 plan. Frankly, that would be a mess.

So, of Course, Do All You Can to Know and List All Your Debts

We don’t want to scare but rather to motivate you. It’s worth the effort to figure out who you owe and to find their accurate addresses.

One obvious place to start is with a credit report. Talk with your bankruptcy lawyer about getting free ones from all three of the major consumer credit agencies.

But it’s very important to know that a credit report is NOT necessarily a complete list of your debts. For some people it might be. But for others their credit reports would be woefully incomplete. Financial institutions and major consumer creditors will quite reliably be on your credit reports. But medical providers and various other kinds of creditors—not so much.

It IS worth sifting through ALL of your paper and computer files (and piles!) to find any other debts. Scour through your memory about possible obligations you haven’t thought about lately. Think about old unpaid landlords and utilities, possible bounced checks, or unpaid personal loans from friends or family.

Possible Claims, Ambiguous Amounts

Consider situations where you may or may not owe anything. Are there any old or more recent unresolved vehicle accidents? Might you have caused personal or property damages to some person or business? Are there any unusual possible claims against you, for defamation, embezzlement or other misuse of funds or of trust? Could there be any claims come out of an old or not so old divorce, non-marital relationship, any family fight, or the closing of a business? Are there any almost forgotten threats against you to pay for anything whatsoever?

Bring any of this stuff up with your bankruptcy lawyer, preferably at your first meeting. Some situations may genuinely not warrant including as a possible debt. Your lawyer is the person who knows how to protect you, and to guide you through the tough judgment calls. You need to ask the questions so that he or she can give you the right advice.

Debt Amounts

 It’s generally not that important to know how much you owe—a sensible estimate is often good enough. But again talk with your lawyer, because sometimes—depending on the type of debt—the amount is important.

Collection Agencies

If you know the original creditor but not a subsequent collection agency, start by listing the original creditor. It may well pass on your bankruptcy filing information to the collector (although you can’t count on this). Also, the original creditor may actually still owe the debt. The collector may have only a temporary collection agreement.

You still do want to list any and all collectors on an account. That’s because it’s hard to know who owns the debt. That may take not just looking through all your papers but also doing internet research and making phone calls. Your bankruptcy lawyer and his or her staff will be your guide.  

Very Old Debts

Most debts can get old enough that the creditors can no longer collect on them. Most states have statutes of limitations on the collection of debts.

But those laws are often complicated, with different lengths of time for different kinds of debts. There are different triggers that start the time running, and other events that can suspend (“toll”) the time from running. The time limit can sometimes be extended simply by you being out of state or hiding from collection.

Even if a statute of limitation arguably applies you’d rather not have to defend a collections lawsuit on this basis.

Talk with your bankruptcy lawyer about what to do to best protect your from old and very old debts.

 

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210-342-3400

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