Co-signing, it seems like something that anyone would do for a loved one or friend. Consider these scenarios: Mom and Dad are asked, by their young adult child, to help them obtain an apartment by co-signing on a lease. Your sister, who’s credit has been shot following a nasty divorce, asks you to co-sign on a loan to help her and her kids transition to a single parent household. A friend, asks you to co-sign on a car, after the finance company won’t qualify them because their income is just slightly under their guidelines. In all of these instances, the friends (borrowers) assure you that they intend to, are able to and will definitely pay the monthly note. They assure you that “it’s easy to co-sign and that it will take just a minute”. Well, it’s true, following a quick credit check and signature, you become ………. a co-signor.
Initially payments are made and things go smoothly, but what happens when, for whatever reason, the payments stop and worse off, don’t resume? Who will the creditor look to, for repayment when they are ultimately unsuccessful in obtaining payment from that adult child, sister or friend? You! Why you ask? because a co-signor is generally defined as a person who makes a promise to pay another person’s debt, arising out of contract, if that person fails to do so. And that’s exactly what you did when you co-signed for the lease, the loan and/or the car.
Now, there are a variety of reasons why someone, who initially promises to repay a debt, suddenly fails to do so. Some reasons are foreseeable, meaning that there were clues that should have let you know that payment was likely to disrupt at some point in time. In considering what some of those reasons might be, you should start with asking yourself, at the outset, why that person needs a co-signor in the first place. Here are some common reasons.
First, the person may be young, with no credit history and with no pattern of responsibly paying their bills. With respect to this person, you have nothing but their word that they will repay the debt. You and the lender are taking a risk. Second, there is the person who has had prior debt, has handled it poorly and thus is unable to obtain an apartment, loan, car or other purchase due to their poor credit history. Of course, a person’s credit history is confidential, unless they share it with you, but if you’ve known this person for awhile and have kept your eyes and ears open, you should have a pretty good birds-eye view of how they may have not been responsibly paying their bills or how they consistently misplace their priorities by shopping first and consistently paying overdue bills later. Third, there is the person, who works, but who just can’t seem to regularly hold a job or who is always borrowing money from friends and relatives (Oh, and of course, rarely paying it back).
All of these scenarios present red flags, to the creditor, who is not willing to lend the money without a co-signor (or a back-up plan). The lender thereafter tells the borrower to come back with a co-signor. Not just anybody, a stable person with a good credit rating and a long-standing employment history. With that, the lender will be more than happy to approve them for the loan. Why? Because when the risk, that they anticipate becomes real, they will turn to the co-signor/guarantor, for repayment.
On the other hand, it is not always foreseeable that your loved one or friend will stop making payments. Some reasons for non-payment come to everyone as a complete shock or surprise. The world is filled with very responsible people who pay their bills on-time, sometimes early, and often times, they even pay more than the minimum due. These people are generally financially frugal, save on a regular basis and don’t shop frivolously. But what happens when they suffer from a long-term illness and can’t work; get suddenly laid off from work; their income is interrupted due to a historic government shut-down; they lose their job permanently or God forbid, they pass away? What happens when your relationship, with this person, goes south and they just choose to not pay?
Same thing. The creditor looks to its back-up plan (and that would be you) for payment. Even if I don’t even live in the apartment, you ask? Yes. Even if I never drove the car, don’t drive or even have a title for the car that I co-signed for, you ask? Yes. Even if I’m retired, on a fixed income and just can’t afford to pay it? Yes. No matter, what. If you co-signed for a car, an apartment, a loan or other debt and if the other person fails to pay……for any reason, you are generally responsible for the repayment of that debt!
I would imagine your next question is: “How much can they make me pay?”. Depending upon how the contract is written, up to the full remaining amount due. This would be possible if the documents allow the creditor to collect against you and the borrower, both “jointly and severally”. This means, that they can come after either or both of you for any portion or all of the debt! Side question: Can they collect the full amount from both of us? Of course not, they can only collect up to the amount of the debt owed, plus accruing interest, late fees and penalties.
Next, you would wonder, what steps can they take to collect from me? The answer lies in general collection efforts and laws. First, they would probably start by simply asking you to repay. Then, of course, the regular phone calls will begin. Long story short, if you don’t repay, then they may seek to file suit against you and hope that you will voluntarily pay after having a judgment entered against you. If that doesn’t work, they may proceed to garnish your wages – you know, the wages from your good regular paying job. They may also attempt to take whatever money exists in any bank accounts or other financial accounts you may have. Or they may attach and possibly sell your home, your car or other asset. Of course, their collection tactics will also depend, among other things, like how your assets are titled and how aggressive they are. In any event, the target will be you. And keep in mind that all of these collection efforts will quite possibly end up damaging your once good credit for years to come.
Finally, you might ask: Why don’t they go after the primary borrower? Because they knew from the start, that going after you was a safer bet. Because it’s probably cheaper, more efficient and more certain that going after you will mean repayment of the debt! Because if the primary borrower is transient, they know where you are. That’s why they wanted you to co-sign in the first place. You were the better risk!
So what is the answer? Should you co-sign? That’s a decision for you to make, but before you do, look out for those red flags. If red flags exist or even if there are no obvious red flags, you must be sure that you can afford to repay the debt if the primary borrower ever stops. In other words, having to take over the payments should not disrupt your other financial responsibilities. So if you can afford it, want to help and would not miss ever being fully reimbursed in case of default, co-sign away. If not, in the words of Aretha Franklin: “You better think!”.
One last point, if default, by a primary borrower, happens or has happened to you, you may wonder what can you do to recover your money? You can take whatever collection measures that the original creditor could have taken. Ask yourself, if I ask nicely, do I think they will pay? Does this person regularly work and have regular wages to garnish? Do they keep money in a bank account that I could attach? Do they own a home, car or other asset that I could attach? If so, then proceed with your collection efforts and hope that you are more successful than the original creditor.
But the bigger point for this article is this: Ask yourself these questions BEFORE you co-sign. If the answer to any of the above questions is yes, then they probably didn’t need you to co-sign in the first place and if they did, repayment is probably not an issue. If the answer to any of these questions is no or you are uncertain. Well…..think before you ink!
Finally, with respect to the “no one’s fault” reasons why payment stopped, such as sudden illness, before your co-sign, find out if this person has short-term or long-term disability income benefits to help with the payment? Agree to the disability insurance that might be available when the loan is first obtained? Find out if the person has life insurance and if the loan is large enough, if they are willing to add you as a beneficiary to a percentage of that policy to cover the default. If they pass away, find out if they have assets that became a part of the estate? That’s right, should they pass away, you can file a claim against the estate for reimbursement. To protect yourself from possible financial disaster, at the hand of someone else, be sure and consider all of these things when thinking about co-signing!
Thanks for reading, please note that I am licensed to practice law in Maryland and the District of Columbia. As such, this blog is based largely off of the laws of those jurisdictions and general collection laws and are not intended to be specific legal advice.
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Until next time!
Categories: Debt Collection