What is Co-Signing?
Co-signing is the act of taking on the responsibility of paying another individual’s debt if that individual is unable to. This means that the co-signer has agreed that they will pay the loan in the event that the primary borrower is unable to pay.
It is important to note that while the creditor cannot receive more than 100% of what is owed; they can collect from both the co-signer and borrower. If the debts are not paid, this can lead to the co-signer experiencing Wage Garnishments or property liens.
For example, if you wanted to purchase a car, but your credit score was low or the interest payments were too high, your father could agree to co-sign a car loan. If you were suddenly unable to make payments, your father would be on the hook. The creditor would contact the co-signer, in this case your father, and make him pay off the remainder of your debt.
What Happens if You Declare Bankruptcy?
Once you have declared personal bankruptcy you are no longer obligated to pay the debt. Unfortunately your bankruptcy does not clear the co-signer from their obligation. Since you are no longer paying the debt, your co-signer is now responsible for paying it back in full.
What Should I Consider Before I Co-Sign a Loan?
If you are considering cosigning a debt for someone, it is important to understand 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 even if they promised to pay the debt. Therefore, before you agree to co-sign for a debt for someone, consider the implication on your lifestyle and household finances if you should be called upon to pay the loan back. Co-signed loans can affect your credit score, limit your ability to borrow money for a car, or enter a mortgage.
If you are considering signing a debt for someone, it is imperative that you are
- Certain that the primary debtor will be able to pay off the loan without having to default payment to you.
- You must consider your own financial situation. If you are left holding the debt, can you afford to pay it off? Are you willing to accept the personal changes you may have to make to your own life?
Instead of cosigning, consider helping your friend or relative by sitting down and working out a financial budget and plan to see they can afford. If their debts are too high to make the payments, then start by addressing these debts and lifestyle choices before entering to additional debt levels.
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