Ep142: Denis and Katie O’Brien – Understand Negative Equity Before Cosigning a Loan

… The consequences of not doing so can be brutal

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Guest profile

Denis and Katie O’Brien decided to create a “Chain of Wealth” after having a tough conversation about Katie’s debt that was piling up. She had more than US$200,000 of debt that included student loans, a mortgage, a car loan, and negative equity. After hunkering down and reprioritizing what is important in life, they’ve managed to pay off all their debt in less than two years, all while getting married and paying for their wedding in cash!


“We often speak about the ostrich technique in terms of payment where you stick your head in the ground and you pretend it’s not there. Don’t do that.”

Denis O’Brien


Worst investment ever

Denis and Katie O’Brien met at a time when Katie was over her head with debt. Before they met, her way of dealing with the lingering debt was to bury her head in the sand and hope that someday it would all go away. Her anxiety over her piling debt was so much that she wouldn’t bring herself to check the mailbox.

But the debts didn’t magically disappear. They followed her when she moved in with Denis in Washington DC. When the stack of bills came knocking in the mail one day, Denis decided that she was done burying her head in the sand and that it was time to deal with the debts head-on.

Flashback to when all the mess started

It was back in March 2015 or 2014 when she was dating a “smooth-talking dude”. It so happened that he needed a car but he had bad credit and therefore, needed someone to co-sign the car loan for him.

After a couple of conversations, the smooth talker managed to convince Katie that if she cosigned a loan for him it would lower his interest rate allowing him to save money for other important things. He promised that this would not affect her in any way and he’d make every single payment.

The ironic thing is that at the time Katie was driving an old 2002 Toyota Corolla, with all sorts of mechanical issues. She could have done with a new car! But here she was helping someone else to get themselves a new car she could barely afford.

From zero car loan to negative equity

Finally, she went to the car dealership with him and he picked out a pretty good car. Not a high-end car but still quite good and expensive, well at least for her.

After the purchase, he told her that he had negative equity. She didn’t know much about negative equity finance. She knew that it wasn’t something good for your credit but she didn’t quite understand what the consequences were. What she didn’t understand was that after cosigning his car loan she had also inherited his negative equity loan.

At this point, Katie had no car loan. She was a 26-year-old graduate, working a normal teaching job and living on her own.

As expected, the relationship quickly came tumbling down as soon after the car purchase. As if that was not enough, the dude defaulted on the car payments.

It now became clear that Katie had bitten more than she could chew. After chasing him all over trying to get him to make payments Katie finally went to a lawyer as she didn’t know what to do because the car loan was attached to her credit.

The lawyer told her she had two options. She could either make him pay for the car or take it and deal with the mess on her own. She came home one night, she was living with her mom at the time, and in front of her house, there sat the car. He told her she could keep the car, it was in her name anyway.

Bearing the weight of someone else’s negative equity

So now here she had a car that she did not need nor could afford. On top of that, she had to pay off her ex’s negative equity debt of $20,000! This was a lot of money to pay off with a teacher’s salary.

To say that she was distressed is an understatement. Other than having to pay off the car loan and equity, she still had to get his name off the title for fear that he could one day come and take the car back after she’d paid off the loan.

A helping hand from her family

She finally shared her woes with her mom and brother and they both did their best to help her dig herself out of her worst investment ever. Her mom went with her to a dealership to see how to make things better.

Feeling like a bozo, she explained to the dealership manager what had happened. Going in, she thought she’d pick out a cheaper car, get his name off of it, and boom, she’s done and life can move on.

Boy wasn’t she wrong! The manager told her that she couldn’t get a cheaper car because she had so much negative equity that she needed a car that would be able to cover a loan equivalent to the cost of the car. So now she was looking at $60,000 cars.

The lowdown on negative equity on a car

The reason why the dealership wouldn’t give Katie a loan was because she had no collateral. So it was high risk for them to give her a cheaper car but with an expensive car, if she defaulted, they’d have more to claim.

Katie was now so frustrated that she didn’t even window shop for a car. She just went and pointed at the first car she saw sitting right on the showroom floor, a blue Honda Crosstour. She didn’t test drive it, she just signed the paperwork and left with a car she’d have to pay $663 a month for seven years. That amount was exclusive of insurance and everything else. Remember, she’s a teacher!

While she had managed to get her ex’s name off the car by trading it off with a more expensive car, she also inherited all the debt to go with it. She had never envisioned her first car purchasing experience would turn out like that.

Getting out of debt for good

About a year and a half after buying the car Katie moved in with Denis and when the stack of bills came in the mail, Denis told her that it was time to get out of that mess for good. He told her that their relationship could not move forward until she got the debts in control. Either she would commit to pay off her debts or forget the ring. However, he was going to offer her all the support she needed to do it.

Getting the debt-free plan together

Denis, a chartered accountant by trade, got straight to work. He created an Excel spreadsheet and calculated everything. The total amount of debt Katie owed at this point was $200,000 worth of debt.

Katie got so emotional and felt trapped. She simply couldn’t see how it would be possible to get herself out of so much debt. She had quit her job to move in with Denis in a new city. So how was she going to pay off that much money while jobless?

After she calmed down, they took the Excel spreadsheet and devised an action plan. Denis committed to covering their basic living expenses and Katie committed to paying off her debt by the time she was celebrating her birthday that year.

Selling off her assets

To make it possible to pay off her debts Katie had to confront the possibility of selling off her assets. It was an emotional process but it had to be done.

She had earlier bought a house for $100,000. Luckily, the house had appreciated and its value was now about $120,000. She was able to sell that for quite a bit of a profit. She put the $19,000 from the sale towards her car loan.

Next to go was the car. It was now worth about $20,000. She tried selling it privately on Craigslist, and other car sale websites without any luck. One day, right before Thanksgiving 2017, she got fed up and decided the car had to be gone by Christmas. She took it to a random dealership and after inspecting the car, they offered to buy it for whatever amount she wanted. So she sold it off for $18,000. The sale was so easy compared to the turmoil she had gone through when buying it that she was a bit disappointed. She expected it to be harder.

Getting down to zero debt

After selling her house and car, Katie still had a ton of debt to pay off. She still owed about $50,000 in student loans and a small medical bill.

They decided to pay off the medical bill first and then figure out how to pay the student loan. When Katie graduated, she had about $33,000 in student-loan debt but she deferred her payments. So when she started paying it back, she owed about $45,000. So it helps to start paying off student loans as soon as possible.

They did more mathematics to see where they were with the debt and how much Katie needed to be debt-free by her birthday. It turns out she had to make payments averaging about $3100 a month towards her debt.

Once again, she was in tears because as a teacher she was making about $2200 a month so she had a deficit of $900. She had the option to push back the dates and pay off the debt after her birthday. However, she chose to stay the course and stick to the goal of being debt-free for her birthday.

Eventually, she did it but not without setbacks

She picked up like a million side hustles. She did everything from charging electric scooters, to shipping books for an author, creating pins on Pinterest, tutoring, basically anything that could make her extra money.

She managed to pay off her student loan about two weeks before her birthday.

There were some setbacks along the way though. When they decided to follow the debt-free plan Katie had to get a job and she did. However, she couldn’t use the Metro to get to work. She needed another car. Remember, she had just sold hers.

They ended up buying a car for $12,000, increasing the amount that she needed to pay off. However, this was much better than the $50,000 car loan she was paying off last time.

Another setback was that they had their wedding coming up in July. Katie’s birthday is in May. So it was a very small gap in terms of saving up for them. They had committed to not going into debt for the wedding. So on top of paying off debts, they had to save up enough money to pay cash for the wedding.

Commitment pays

Katie’s commitment and hard work to stay the course paid off as they were able to pay for their wedding in cash. She also paid off all her previous debts.

Most of the gifts that they got for the wedding were cash. So after the wedding, they had extra money laying around for the first time. As of last month, they are debt-free.

Lessons learned

If you don’t feel right about something don’t do it

Katie remembers the day she cosigned the car loan for her ex vividly. She had this nagging feeling in her stomach. While she didn’t understand the loan process, she had a sixth sense that told her something was not right about the whole scenario. Unfortunately, she ignored her gut landing herself in trouble with the creditors.

From this she learned a huge lesson: if you don’t feel right about something, don’t do it because, at the end of the day, it is your name that will be on that line. You might think it’s just a stupid little paper, no big deal. But the creditors and the lenders do not feel the same way. At the end of the day, it’s going to be your tail working two or three jobs crying and exhausted having to pay that debt off.

Understand what you’re signing before you put down your signature

Never cosign a loan for somebody you’re dating, ever, or any other adult for that matter. But, if you must, always be fully aware of what you are signing up for. Do your research and make sure you are making the right decision. The decision you make now is going to impact you later on in your life.

That piece of paper you put your signature on is legal and binding. You are going to be held accountable. Understanding the terms of that documents is therefore critical.

Be deliberate with your debt-free plan

One of the reasons why the couple was able to get Katie out of debt was because they were deliberate about being debt-free. They put a debt-free plan in place after figuring out where they wanted to go.

If you’re in debt come up with a reasonable plan and follow through with it. Re-evaluate your plan now and then and always work on achieving the goals of your plan.

Put your priorities in order

The secret of how to become debt-free on a low income is to put your priorities in order. Like Katie, you have your everyday bills to pay off as well as different types of debt to clear. It’s a tough situation to be in but you can do it. Put your priorities in order, cut back on your spending and spend only on what is important and necessary.

If necessary, work an extra job or have a side hustle on top of your full-time job. Then put all that extra money towards your debt to help pay it off quicker.

Seek help from a financial advisor

You may not have a Denis to help you stay the course toward a debt-free lifestyle but that doesn’t mean you should do it alone. Go to a financial coach and ask for advice. If you have no one that you feel that you can go to, go to a financial advisor, a professional in the industry who can help break things down for you. The truth is that you can’t do it alone, reach out for help.

Don’t bury your head in the sand

Pretending that the debt does not exist will not make it go away. Don’t practice the ostrich technique when it comes to paying off your debt. And that’s sticking your head in the ground and you pretend it’s not there. Don’t do that.

Andrew’s takeaways

Don’t help others until you can help yourself

It doesn’t matter how much you know someone, if you’re not financially capable to help yourself, don’t go helping them. You should refrain from cosigning loans at all, especially for people you’re in a relationship with because chances are it will get ugly.

Don’t do things in isolation, especially where your money is concerned

Even though you may feel confident in your decisions, always talk to someone before you go ahead and put your money on the line. Even the best professionals in the financial world talk to other people when considering their investment options.

Don’t put your money where your heart is

Never invest or get involved financially with someone you’re in a relationship with. Now, there are times that such things can work out. But it’s a danger zone. The best option is to not do it and avoid entanglements as much as you can.

Have someone you can turn to for advice

Identify someone that you can go to for advice even before you get into financial trouble. Ask yourself right now who your go-to person is. If you are in financial trouble, who would you go to? They could be a sibling, parent, colleague, or friend. Designate that person today so that when that financial event comes up, you have someone to turn to for advice before you make the wrong choice.

Don’t get attached to things

We’re all going to be dust under the ground someday. So don’t build up your life around attachment to the material things you have. Sell off that house if it will dig you out of debt and get you out of negative equity.

Actionable advice

Katie and Denis’s advice is to be very aware of what you’re signing and understand the legal implications of everything you do. Just because you’re young is not an excuse for not understanding what you’re doing. If anything, that’s the most critical time that you have to fully understand what you’re doing, and do your homework.

No. 1 goal for next the 12 months

Denis and Katie’s number one goal for the next 12 months, now that they’re finally debt-free, is to save up for a house. They are looking to put up a 20% down-payment in the next 12 months.

Parting words


“No matter how scary it is for you to face the debt demons, get it over with and face them now, because it’s not going to get any better.

Katie O’Brien


“There’s a lot of great resources online about negative equity that you can use to make the debt load a lot easier.”

Denis O’Brien

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About the author, Andrew

Dr. Andrew Stotz, CFA is the CEO of A. Stotz Investment Research, a company that provides institutional and high net worth investors with ready-to-invest stock portfolios that aim to beat the benchmark through superior stock selection.

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