Is there anything worse than some hated ex coming back into your life? In some bankruptcy cases, it happens. Do you know that yuck feeling of hearing that voice inside your head say, “Oh no, now I have to deal with _________ again?” It makes my stomach hurt when I give people the bad news.
The number one way that an ex can cause problems in a Chapter 13 bankruptcy case is when they have cosigned on a car with you. In most Chapter 13 bankruptcy cases, we are able to lower interest rates on automobile debt down to 6 percent. This feature of Chapter 13 is particularly wonderful when you have interest rate of 30 percent and we are knocking it down to 6 percent. What a relief, right! All this can go out the window if you have an ex that was involved in the purchase of your car.
If an ex is cosigned on the car with you, this becomes super problematic. If we try to lower the contract interest, the creditor be able to sue the ex for eliminated portion of the debt. As you can imagine, they will scream and holler up to the hilltops. To protect any cosigner from being pursued by a creditor, we can take advantage of the cosigner protection of the Bankruptcy Code as long as we pay the full contract amount in the Chapter 13 plan. Paying cosigned interest of 30 percent in a Chapter 13 plan can sometimes make it impossible. Another option in some cases is to surrender the car to the creditor and let the ex deal with all of the fallout.
It does not matter who signed first or second on the car note. If two people signed it, then two people can be pursued for 100 percent of the debt.
A second way that an ex can sneak up on you in a Chapter 13 is income taxes. When you sign a joint tax return, you are jointly liable for the taxes. The most common case of this happening is when the ex is self employed and has some shady tax preparer (not a CPA) file the tax returns.
I have seen Chapter 13 cases where we get the case filed and the client has a reasonable monthly payment. Then, a few months after the case is filed, the Internal Revenue Service swoops down from nowhere and files a claim for $100,000.00. This could potentially increase the client’s Chapter 13 payment by an extra 1783 per month.
How can you avoid these nightmare ex from hell scenarios? The answer is to never sign a joint tax return and never cosign for any person’s car and never ask anyone to cosign for you. When the car salesman says, “all you need to do is get your boyfriend/girlfriend to sign with you and we have a deal” run away. Run away! As fast as you can, run away!