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Lenders often will want a “co-signer” on money loaned to people who represent a marginal credit risk. Parents may co-sign for their son or daughter’s first car loan or mortgage because they don’t yet have a strong credit history of their own. A friend or family member may guarantee your refinancing loan because you do not have any property to secure the loan and can’t qualify for the loan without a co-signer.
Co-signing a loan means that if the primary borrower does not pay the co-signer will have to. A co-signing agreement creates joint and several liability for the loan. That means that the debt is owed both together and apart from the primary borrower.
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Right To Collect
You both owe 100% of the debt. The loaner can not get paid more than 100% of what is owed, but they are empowered to collect from both persons named on the loan. Collection actions can be taken against either party and can include legal action resulting in wage garnishment or liens against property for both the primary borrower and the co-signer.
Lets say for example that your father agreed to co-sign a loan because you were having some financial trouble, really needed help, but could not get the loan without your help. Now it is a year later and you lost your job and missed the last few payments on the loan. Upon the default in the loan by the primary borrower (you) the creditor will contact the secondary borrower, the co-signer, (your father) to make good on the loan.
Bankruptcy Eliminates Your Obligation, Not The Co-Signers
One of the advantage of bankruptcy is that you would be absolved of any unsecured debt. However this benefit does not extend to your co-signer.
You would not have to pay, but your father would still be responsible for any co-signed debt. In the case of a mortgage, your lender would foreclose on the home and sue you for any deficiency. Since you went bankrupt, you don’t have to pay this balance so your mortgage lender will then proceed to collect the remaining amount owing from your co-signer.
If You Are The Co-Signer
As a co-signer, you have no legal recourse against the primary borrower. You can’t sue someone for something that you agreed to do.
Co-signing a loan means you have to pay it. If you enter into such an agreement it should be done with the expectation that you will end up having to pay the loan back regardless any promises to pay you get from the primary borrower.
Co-signed loans will show up on your credit report and can have an effect on your ability to borrow, including your ability to qualify for a car loan or a mortgage, just as if you had borrowed the money yourself.
Be careful that co-signing a loan doesn’t lead to your own bankruptcy. Clearly one should not enter into any sort of co-signing agreement if you lack the ability to make good on the money borrowed. No one should put their financial future at risk to help out a friend. If your friend needs help you are far better to simply give them the money they need with no strings attached, and if you can’t afford to do that, then you certainly can’t afford to borrow money to give to someone else, which is exactly what you are doing when you agree to co-sign a loan.
If you have co-signed a loan that has gone bad, you need to know your options, a licensed bankruptcy trustee is your best source for real relevant and frank advice about your options.
We meet with many people who have co-signed debts. Sometimes filing a bankruptcy or proposal is still the right solution for them if they have significant other debts. It’s also not unusual for both the original debtor and co-signer to file a bankruptcy or proposal if both have debts they cannot repay. Contact us today for a free consultation so we can give you some options to consider.
