DON'T talk to the creditor. DON'T trash your other good credit. DON'T declare bankruptcy for a good while.
The IRA is protected. Protect it.
First and foremost, the IRA is untouchable in MD. Creditors cannot touch it. Bankruptcy cannot touch it. Abe must not touch it. The IRA is a sort of "trust account", and Abe, as a "trustee", must protect that from misspending (by Abe).
The penalty for failing as your own trustee is 10% - and since the money wasn't taxed before, it's taxed now both Federal and State. In short, a fool cashing out an IRA in a panic will lose 50% to taxes -- and worse, there won't be withholding, so the 50% will come as a Huge Surprise on April 15 of the next year.
But that is the fate of fools. Abe must take care not to be one.
It's not as severe as you think. Don't make it worse.
Right off the bat keep your other credit relationships tip-top. Pay all your minimum payments on-time etc. Keep the fire isolated to one place.
Having ONE bad mark from ONE creditor is not the end of the world for your credit report. The 7 years is already counting down because it started at the R9. And it represents one dispute with one vendor. A bankruptcy is much worse. It means a total financial meltdown, and it's 10 years - not from the R9 but the final disposition of the bankruptcy a year from now. So it's really 11 years and hasn't even started yet.
Declaring bankruptcy because of one bad mark would be like a gifted chess player losing three games in a row, and then rage-quitting chess.
The one thing bankruptcy will do - and weak minds enjoy this - is make the defaulted creditor bother you less. In theory. And that's no guarantee. That's not much of a benefit compared to the heinous cost of it. You can throw away their letters for free. You can tell them to shag off on the phone, for free. You don't need bankruptcy for that.
However. Abe is able to effectively use the spectre of bankruptcy like a "Fleet in being", having the very real effect of deterring the creditor on the fear that Abe always could declare bankruptcy. Abe gets to use this "chilling effect" to full force.
DO NOT TALK TO THE CREDITOR
Nothing good can come of it, and only bad. They are extremely good at manipulating people. Say nothing except "stop calling" And. Hang. Up. Anything you say can and will be used against you... well in theory negotiations are excluded, but you have to do everything right to make that happen, and they're really good at tricking you into blowing it.
I get where the creditor call can feel like a scab you just gotta pick. Don't.
Oh, but they might sue me!
No, that's not gonna happen.
Assuming you've been candid about Abe's assets, the first thing the creditor will do -- pre-lawsuit -- is do an asset search on Abe. They're going to see an Abe with virtually no attachable assets.
See, here's the thing. When you sue someone, it costs typically $5000+, so you better be likely to recover significantly more than that. And you have to assume the defendant will do everything possible to defend. You might get to the very end of the lawsuit (verdict) and boom! The Defendant declares bankruptcy, undoing all your work! Oh no! So you must plan for that outcome and make sure the defendant has, say, $10,000 of assets beyond that which is protected in bankruptcy by MD law. And MD law protects plenty! $25k of home equity, disability benefits and judgments, insurance payouts, public benefits, IRAs of course, $5000 in clothing, books, and tools of trade, $1000 in appliances, burial plot, and a $6000 wildcard on top of that! Abe is completely protected.
Oh, and legal warchest too. The court wants you to pay your lawyer, and treats your own lawyer as a priority debt. It's not like they'll clawback money from your lawyer to pay other creditors, nor would plaintiff's lawyer ask for that (as a professional courtesy).
So a lawsuit would be an utterly futile gesture. And they know it. And they won't sue.
In the meantime, Abe should cut costs and save up.
Leave the IRA alone. Don't rush to pay down the existing credit card (keep paying minimums on-time, obviously). Cut costs hard, and save up a cash war-chest. (you should have 6-9 months of emergency fund anyway, so this is just a fraction of that). I'd like to see Abe enter this thing with $5000 ready to go. That's the price of a clean exit.
In the meantime, Abe needs to get a thick skin about an infinite number of collection calls and letters, and never say anything except to shag off. They will come until below, and that's the cosmic punishment instead of bankruptcy.
Eventually, this happens.
A year or two goes by. Abe gets a lawyer to write up a contract. It says:
- Abe was the innocent victim of a swindler.
- The creditor gets $5000, in exchange for which, Abe is removed altogether from this matter.
- There is a dispute over whether this is Abe's debt, or not. As such, no negative statements will be made by either party about the other, and in particular, no negative data will be reported to any credit reporting agency, with $10,000 liquidated damages for breach.
- Abe never benefited from this debt, and as such, no 1099-C will be filed, nor will any income be reported to any agency.
- Venue, jurisdiction, whole agreement, counterparts, blah blah.
One day, completely out of the blue, this offer shows up on the creditor's doorstep. The creditor is going to think they hit the lottery because up until now, this was a dead-dog uncollectible. They don't care about this other stuff. They care about the payday. Will they agree to that? Oh, you betcha.
You could probably have your lawyer haggle the number down. Whatever. The "No 1099-C / Clean the Credit Report" is a showstopper, and is good cause to sweeten the deal.
And Abe is out. Clean and clear.
Two months later, check the credit report. Clean and Spiff.
It will literally be as if it never happened. Well, except for the $5000, but that will be the ultimate price of the affair.
Oh noes! They sued anyway!
Then you declare ...
... that they are idiots. (Did you think I was going to say something else?)
Even if they know about the abovementioned $5000, even if that was somehow unshielded... Abe's lawyer has dibs on it. They can't argue with that.
So get in conference and you say "I'll spend my last dollar hiring my lawyer to make the most vigorous defense possible, bar none. And then, after verdict, I'll have my lawyer thwart all your collection actions. If you finally get a garnishment, I'll declare bankruptcy the next day, and all my assets are protected. OR, you can go for what's behind door #2. (and present the contract above).
That will be the end of that lawsuit.
Then there's the other lawsuit...
Abe would have a right-of-action against Bella, on two prongs. First, Abe can get a civil court order to hand over the car. (the inverse of a restraining order, compelling rather than prohibiting behavior). And if Bella refuses, the judge has the option to jail Bella indefinitely for civil contempt of court (which is a sanction, not a crime).
Second, Abe has the right to recover all losses and costs. However, all the friction we discussed above that protects Abe from creditors, has the same effect to protect Bella from Abe getting a useable recovery. So Bella would have to achieve some level of wealth before that target would have any fruit. Presumably that is not the case, if Bella is using romance to swindle cars.
Abe would have to file the suit before the relevant statute of limitations, but could spend some additional time trolling out the actual litigation, and then would have 10 years to collect, which is renewable. For what it's worth: If Abe can prove fraud/crime was involved, then Bella cannot wash this debt away in bankruptcy.
