The liability of a co signer is the single most common misunderstanding about the law that I see.
Put bluntly, a co-signer is just as liable for the debt as the primary borrower.
Co sign someone else’s debt and you put yourself in the creditor’s cross hairs.
That should make the hair on the back of your neck stand up.
Co-signer not just a reserve player
Too many people who sit in my law office think that their role as a co-signer kicks into action only if the creditor can’t manage to collect from the original borrower.
There is no ranking of the legal obligation: the co-signer liability is just the same as the borrower’s. And the creditor doesn’t have to try to collect against the other party before looking to you to pay.
Why a cosigner is needed
When you’re asked to co-sign for someone, think about the creditor’s motivation.
The lender is worried that the original borrower won’t pay as promised. It’s a troubled loan from the very beginning.
You’re being asked to guarantee the loan so the creditor has you on the hook as well. You’ve become the creditor’s insurance.
For all the best intentions of the person who asked you to help with the transactions, life happens. If the original borrower loses a job, gets sick, files bankruptcy, or even dies, the debt is yours.
Your credit report is at risk of taking a hit if the other party doesn’t pay on time, even if you don’t end up having to pay the debt.
Saying no is hard
For all the logical reasons that taking on someone else’s debt is a bad idea, it’s not easy to say no.
After all, the people who will ask you to co-sign a loan are people you’re close to. Family. Dear friends. Those in trouble.
Co signing seems innocent and cost free, because the person asking expects to pay as agreed.
If they see your signature as a mere formality, you look as if you aren’t a real friend if you decline.
Student loans the worst
In today’s law, student loans are forever. Federal loans have no statute of limitations; they live on til they’re paid.
They can’t be discharged in bankruptcy, whether you’re the student or the co signer.
Private student loans have no provisions for deferments, discounts, hardship discharges, or payment extensions.
Student loans of whatever stripe are likely to come around with lots of zeroes after the first digit.
And the student is undoubtedly a child or grandchild. Limiting your exposure to a crippling debt is tough at the interpersonal level.
Evaluating your risk
So, what do you do when asked. Nancy Reagan would advise: just say no.
But it may not be that easy.
I suggest you consider
- the amount of debt you’re assuming
- your age
- the purpose of the loan
Consider how a default on the loan would impact your financial life.
If called on to pay the debt, would repayment overlap your expected retirement?
Are you financing a new car or a college education?
Whatever your decision, realize that you’ve painted a target on your back, should anything go wrong.