Q Dear Rick:
I am 25 years-old and I got myself into a problem that I hope you can help me with. I graduated from college a couple years ago and for the first time in my life I started making some money. About two years ago, a friend of mine got me involved in a real estate investment. Our goal was to fix up the apartments and then rent them out. For my share, I had to put up $65,000. I only had about $15,000 so I borrowed the remaining $50,000 from the bank. Unfortunately, things did not turn out as planned and the investment went belly-up. My plan had always been to use the distributions from the apartment to pay down my loan. I figured that since the investment went belly-up that I would not be responsible for the loan. Unfortunately, I found out otherwise- I am responsible. In addition to that, I was also told that since I co-signed the loan to buy the apartment, I am also on the hook for that. My friend who sold me the investment told me that since I do not have any money that more likely than not the banks will not come after me. My question to you is do you think the banks will go after me and if they do, what should I do?
A Dear L.B.:
There is no nice way of putting this – your friend is dead wrong. Just because you do not have the resources to repay the loan does not mean the bank will not pursue an action against you. In fact, I would be surprised if they do not come after you. After all, not having the resources to repay the loan does not mean the bank will not get a judgment against you and seek to enforce it through garnishment of your wages. In other words, the bank, if they do get a judgment against you, can seek an order from the court ordering them to pay a portion of your wages to them until the loan is satisfied. Ignoring the situation will not resolve the problem and can cause you some embarrassment at work. Therefore, you have to pursue other alternatives.
In your situation, there are a couple of different options you can pursue. The first is to work with the bank to see if a deal can be reached for an amount less than the current balance owed. Banks will frequently restructure debt and even forgive portions of loans in the right situations. Another alternative, and one that you may not like to hear, is bankruptcy.
Since as you mentioned you do not have assets and you are of limited means, a bankruptcy may be the option to pursue. It is possible that if you went through bankruptcy you would be able to have the debt totally discharged. This will allow you to get a fresh start and put the past behind you. Of course, bankruptcy does come with some costs involved.
When someone does go through bankruptcy, not only is there the financial cost of paying for the attorney and the various filing fees but it will have an impact on your credit scores and you may find it more difficult to obtain credit over the next few years. The fact that your credit scores would come down also could impact future employment because many employers these days are using credit scores as part of their due diligence in deciding whether someone should be offered a position or not. Therefore, if you leave your current employment you may find it a little more difficult to obtain a new job.
In reviewing your situation, considering your age and the fact that it would take you years and years in your current situation to pay off the debt, I would lean to filing bankruptcy. I do not like to encourage people to go into bankruptcy; however, I believe it is something that makes sense for you and something that will allow you to have a fresh start, which is exactly what bankruptcy, is meant to do.
I recognize that there still is a stigma from bankruptcy, however there should not be. Many successful people have used the bankruptcy laws to their advantage as well as corporate America. Let’s not forget that it wasn’t too long ago that General Motors declared bankruptcy.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org