Thinking of cosigning a loan? What could possibly go wrong?
When you cosign for someone else, you are considered to be equally responsible for repayment. If the other person doesn’t pay then you’re going to need to do so.
The lender can take all collection activities against you, including starting a lawsuit. Your wages can be taken, your bank account frozen, and a lien placed on your real estate.
It doesn’t matter if you’re first on the loan or second – you’re 100% liable for repayment when you cosign, just like the other person.
It Requires Trust
When deciding whether to cosign for a loan, it’s not enough that you love someone. You need to have an objective belief that they’re going to live up to their end of the bargain and make the payments.
A little while ago I had a woman come into my office to talk about her bill problems. We didn’t think bankruptcy was her best option – until she started talking about cosigning for a friend’s car loan. The friend didn’t pay, moved away and left my client holding the bag for the deficiency judgment after the car was repossessed.
There was also the father who had cosigned for student loans for all four of his children, none of whom had made any payments on them after graduation. With over $300,000 in unpaid student loans at the age of 61 years old, the father found himself talking with me rather than spending his time elsewhere.
You Probably Can’t Get Out Of It Later
When you cosign for a loan, don’t assume you can get your name off the documents later on. If the other person makes timely payments then perhaps the lender will do so, but if the loan goes into default for nonpayment then there’s no chance you’re getting out of it.
If the other person doesn’t pay, you need to assume you’ll be on the hook for the money.
Cosigners And Bankruptcy
If the other person files for Chapter 7 bankruptcy, that impacts their responsibility for repayment – not yours. If you want protection, you’re going to need to file for bankruptcy as well.
If the other person files for Chapter 13 bankruptcy, collection activities against you have to stop while the Chapter 13 is going through the court system (assuming it’s a consumer debt as opposed to a business one). But at the end of the other person’s case, the lender will come knocking on your door for the unpaid balance (plus interest).
Again – if you want to get out from under your cosigner liability, you’re going to need to think about coming to see me.
Cosigners And Debt Settlement
If you cosign for a loan and the other person settles the account, that’s going to impact them as well. The only way the lender settles with you is if your name is on the settlement document. More often than not, settlement with the other borrower doesn’t mean a thing for you.
Before It Becomes Trouble
If you’re thinking about cosigning for a loan, assume the worst happens and the other person doesn’t pay the debt. What will you do, and how will you react?
How badly will it influence your personal relationship with the other person?
Can you afford to keep the payments going if you need to do so?
In the words of Dirty Harry – do you feel lucky?
These answers will help guide you as you dive into the world of the cosigner.
Image courtesy of quinn.anya