What is co-signer on a loan mean for your, and how does it affect your obligation if you have guaranteed the debts of a bankrupt individual?
To act as cosigner on a loan or guarantor is the act of taking on the responsibility of paying another individual’s debt if that individual is unable to do so. If you agree to cosign for another person’s debt, it means that as cosigner on the loan, you guarantees to pay back the loan if the primary borrower is unable to pay.
The individual or company loaning the money (creditor) cannot receive more than 100% of what is owed; however, they can collect from the co-signer on the loan and borrower BOTH under what is called “joint and several” obligations. Thus, the creditor can collect the full amount for just one party or divide i tup between the two parties. Legal actions to force the cosigner on the loan and borrower to pay back the debt can involve debt collectors or legal actions which can lead to wage garnishment or liens on properties.
One example would be that your father agreed to co-sign a furniture purchase loan because you had a low credit score and the interest payments were too high. A year later, if you find that you are unable to make payments because of a car accident, your father could be made to make the payments that you were no longer able to make. Since you were unable to make the balance of the payments, the lender has the right to contact the co-signer and make him pay the rest of the debt and even take him to court to get a judgement against your father which can be used to seize his assets or garnish his wages.
What if you declare personal bankruptcy as guarantor?
Once you have declared personal bankruptcy you would not be obligated to pay the debt, however, if you have a co-signer on your loan, then they would continue to be obligated to pay the remaining debt for which they co-signed. And not just 50%,of the debt but for the entire 100%. If you declare bankruptcy and decide to or are unable to pay your mortgage payments, the bank will begin foreclosure action which will allow them to sell the house to pay off the mortgage. If the house or property ultimately sells for less than the full amount out the mortgage including accrued interest, penalties and legal fees, then the bank has a right to try to recapture that shortfall from any guarantors on the property. . However, once you declare personal bankruptcy you no longer have an obligation to pay this balance but the mortgage lender can then proceed to collect the remaining amount owing from your co-signer.
What should I consider before I become a Co-Signer on a loan?
If you are considering cosigning a debt for someone, you need to know that you have no legal recourse against the person to whom you are signing for if they fail to live up to their financial promises. As a co-signer, you cannot take legal action against the borrower eve if they promised to pay the debt.. Therefore, before you agree to co-sign for a debt for someone, consider the implication on your life-style and household finances if you should be called upon to pay the loan back. Co-signed loans can affect your credit score and limit your ability to borrow money for a car or enter a mortgage.
If you are considering signing a debt for someone you should be prudent when agreeing to any sort of agreement especially if your friend likely lacks the ability to pay off the debt. You must consider your own financial situation which could be significantly affected if you are left holding the debt and the personal changes you may have to make to your own life if you are called upon to make the loan good.
Instead of cosigning, consider helping your friend or relative by sitting down and working out a financial budget and plan to see what if anything they can afford. If their debts are too, high to make the payments, then start addressing the debts and lifestyle choices before entering to additional debt levels.