My Consolidation Loan Is Not Working

Category: Bankruptcy Q&A

debt consolidation problemNote: the question in this article contains old surplus income limits. Click here to review the updated limits.

Question: About 3-4 years ago I had applied for a consolidation loan. However since then I have gotten myself in over my head so to speak. I have over $10,000 in credit card bills, plus my loan payments as well as a car. I have recently moved and secured a job but I am struggling to even pay for my rent. I was wondering if I apply for bankruptcy what happens – what do I owe? Can I keep my car/car payments? And if my father co-signed for my consolidation loan would this affect him at all?

Answer: If you file bankruptcy your debts are included in the bankruptcy; you no longer owe those debts.  However, it’s not quite that simple:

First, during the bankruptcy you are required to make payments to your trustee based on your income.  The more surplus income you have, the more bankruptcy costs.  So while your debts are discharged, you will still make some payments towards your debt.

Second, bankruptcy only covers unsecured debts (like credit cards and unsecured bank loans).  If you have a car loan (which is a loan secured to a car) you can keep the car, but only if you continue making the car loan payments. Your other option is to surrender the car back to the bank and then the remainder of the loan will be included in the bankruptcy.

Third, if you have a co-signer and you go bankrupt, the co-signer remains responsible for the loan.  If your father co-signed your consolidation loan and you go bankrupt, the bank can go after him for the money, so he will probably want to make payment arrangements with the bank directly.

Based on these factors, a bankruptcy may not be the best option for you.  You should consult a licensed bankruptcy trustee to review all of your options before making your decision.