The best way to avoid a bankruptcy is not to get into debt trouble in the first place. Don’t overspend, especially on credit cards, and pay all of your bills on time. Also, try to build up an emergency savings fund so you have a bit of a financial cushion if you lose your job or have a medical crisis.

If you do fall behind on your debt payments, there are things you can do to avoid bankruptcy. Debt consolidation is a process by which you roll most or all of your debt into one loan that presumably has a lower interest rate and a lower monthly payment. If you have good credit, you may be able to do this on your own by transferring all your balances to one low-rate credit card or taking out a second mortgage or home equity loan. If these aren’t an option, you can work with a non-profit credit counseling firm to consolidate your debt.

Debt settlement is another option to avoid bankruptcy. In debt settlement, you negotiate with your creditors to accept less than they are owed. For example, if you have $20,000 in debt, and can pay off half of that, you may be able to get your creditors to accept $10,000. Debt settlement is not ideal, as it will hurt your credit score, but it is a better alternative than bankruptcy.

If you do wind up declaring bankruptcy, don’t go it alone. There are bankruptcy attorneys who specialize in the process.

Whether it’s a car or a motorcycle, co-signing on a loan for a friend or family member is a bad idea.  First of all… you are helping someone throw money down the drain via interest charges.  Now before you bring up the ‘helping to build anothers credit’ fallacy… I’d quickly point out that a lifetime of credit use is a lifetime of throwing dollars out the window (for lack of a better metaphor).  Also, when we cosign, the price of the item is almost always grossly inflated and often brand spanking new.  Never buy new… let someone else loose thousands in minutes as they drive the purchase from the inflated price arena (also known as a Dealership).

See also, How to buy a used vehicle

Why help someone ruin your credit?

When you cosign for a friend you are telling the bank “If they don’t make the payments I will”.  Bear this in mind because this happens quite often.  As a co-signer you are responsible for the loan and if this debt isn’t satisfied according to the agreement, your credit report will suffer.  The following two examples are from Debt Prison readers who were faced with issues regarding co-signers.  The first cosigned for a boy friend… to later have him default and dragged into court.  The other is from a young man who is defaulting on a debt in which a friend’s father graciously posed as the co-signer.

Hi Debt Prison,

I apologize in advance…this is a lengthy question. I just want to provide as much info as I can. I have been documenting all my communications to be prepared as a friend told me to do this.

I cosigned a loan for an ex-boyfriend on 11/26/2002. (Yes – I have painfully learned my lesson to never cosign again!) I was 20 years old at the time, attending college, and very naïve and unaware of what the consequences of my contract obligation would be. The ex was also pretty oblivious when we did this. We were stupid college kids. I signed it because my ex-BF promised he would make his payments on time. The loan was also quite upside down at the time but I did not realize this until after the fact years later when there was a problem…I signed away just trusting the ex would pay the payments and did not think twice. It is an 84 month loan for a used 1999 Jeep Grand Cherokee. He traded in two lease cars for this loan. The amount financed on this date was 27.7k and 37.2 for the total sale price.

Anyway, of course, he started not making payments in 2004 and 2005 and not telling me this. I found out when the bank sent me a letter that payments were 60 days late. At the time we lived together and I was notified. I paid these immediately after being notified and scolded him not to do this again as it was leaving negative marks on my credit report. He was paying for a few years until recently the credit union actually called me in May 2008 asking for March and April’s payments. At this time, I am out of college and working but living paycheck to paycheck as many Americans now are. I can only afford to pay for my “own” financial obligations and cannot pay on his car anymore. (I only did this 3 times or so the payment was so high and I have been eternally broke since college paying my own way through).

We have been broken up now for 4 or 5 years now and have not lived together since. I did call him and ask why he had not paid for March or April and not told me. He told me that he gave the keys to the car to the bank in late April and intended not to pay anymore. I called the bank to verify this and they told me that they had not received the vehicle. At first I tried to negotiate a settlement but they said they could not do a settlement without the car because they need to sell the car then have it go to the recovery department. I told the bank they could repossess the car (which I didn’t know they needed my permission to just say so! I found this out by fluke). I did not know much of his whereabouts just his mailing address that they already had and his cell phone number. I called the bank a week later and it had been repossessed. I gave her my address so she could send me the letter of notice to sell the repo. It went to his address but not mine so I called to clarify that we had not lived together for 5 years and to mail any future correspondence to my current address.

A week letter I receive a letter with new amount owed after selling the repo. As of May 2008 the remaining balance was 15.7k and they say the sale of the vehicle resulted in proceeds totaling $2k for a remaining deficient balance of $9441.86. My credit report is showing this as a charge-off as bad debt in May 2008. Still being unable to pay I let the bank know that I could not pay it. By luck, the ex called to let me know that he received a summons to go to court about this and that my name was also on the letter and that I should go too. I asked him to send me a copy of the letter so I could have more detail but he never did. Therefore, frightened that I would miss a court date I called the bank to ask them to send me the info.

I was pretty upset because what if the ex never called me and assumed I also received the letter? They were not keeping me in the loop and finding out from the ex is not the most reliable info. They would have thought I did not show up to court on purpose when in fact I never knew I needed to. When I called, at this point, they said it was now with a collection agency and I needed to call them. I called the agency and it was like pulling teeth to figure out whether I needed to show in court or not. I asked them to send a copy of the letter. They admitted they sent the letter only to his address and not mine. I gave them my info. I received the notification that they are representing the credit union to collect the debt from me and that I can dispute the amount in 30 days.

The letter was dated Oct 29, 2008 so I still have time to respond if need be. But I don’t think I need to dispute the debt it is real. Should I send a response letter that I have received their communication but cannot pay? Or is this detrimental and maybe I should just not respond? Guess I just need to wait and see if I really do need to go to court? They told me that I was not being summoned at all just him and my name was just on the letter he received since I am the cosigner. Turns out he never showed up in court either. Not sure what his plans are. I don’t know what I can really do here. Do I just sit and wait to be summoned? They said they will try to collect from him first but this whole situation is just stressing me out. I don’t want to have to file bankruptcy over this or go to court for that matter.

Thoughts? Comments? Thanks for even taking the time to read this. Any words of wisdom are truly, truly appreciated.

Debt Prison response…

Wow Cosigner,

I had to break your comment up into sections to more easily read it. So let’s see if I’ve got it. Old debt on a jeep, repo, left over debt from sale of jeep and previous balance on the loan…
You are cosigner.

As a cosigner you are obligated to see that this debt is satisfied or your credit report will suffer. Thats why we have co-signers… to help others ruin our credit…. Just kidding…

In this case your credit is on the line. You’ve been doing an excellent job of trying to stay in the loop. You should. I would go to court as though my ex bf didn’t exist. I would talk to the judge about the circumstances… the one’s that you’ve briefed me on above.. Then try and cooperate with the court. But place as much pressure on ex bf to satisfy the debt as possible. In fact the court should place the blame on the ex and try and work with him mostly… let’s hope.. however, you are responsible for this debt.. as much as him.

The court will understand that you are in the middle of this situation without having caused it… so they’ll likely look kindly on you… the problem is your credit report. I honestly don’t know how this will play out on your credit file. Perhaps you will come back and let me know later on (thanks in advance!!) But to get to my overall point.. go to court and participate as much as required. Remember it’s your credit on the line…

Hi Debt Prison,

I was 19 when I got my loan with a co signer my friends dad, it was a 20000$ dollar commercial loan we did not put anything down but I made payments as much as I could then I wasn’t able to make payments due to financial reasons and my friends dad is tired of having to make payments and so I was wondering if I am not able to make the monthly payments what should I do..cause monthly payment is 700 $ month and I only make 750 a month from which I have to pay rent and food and bills so leaves me with like 200 a month which I save but a not able to pay it off ….what should I do?

Debt Prison response… 

Hey Bobby,

In this case the creditor comes after your friends father. That’s the price he has to pay for co-signing – and that’s what co-signers are for, to give the creditor someone else to chase after for a payment. This is what I would do; I would pay my friends dad what I could each month, and keep a tally of what I owe him. Then as the years go by I would repay the man until I had paid back all that I owed him plus more.

Your other options are:

Sell something to generate cash

Earn more money each month

Discuss this article and share ideas at Debt Prison Forums.

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