In these tough economic times, many families are facing unprecedented financial challenges. This country’s recent Great Recession has dealt, and continues to deal, a significant blow to the budgets of Americans—leaving millions in debt, underwater in their mortgages, perpetually jobless and looking for any means necessary to get back on a financially-healthy track. As a result of this economy, many need loans and are unable to get them without the financial support of a co-signor.
In part one of the series, “The Responsibility of Co-signors in Default and Bankruptcy,” we’ll look at why it’s better to be cautious than to co-sign. Co-signers typically have established credit to help a borrower qualify for the loan. But, if you’re thinking about asking friends, family or business partners to co-sign on a loan, or if you’re a friend or family member who is considering co-signing, it’s vitally important to understand that, unlike giving a job reference, co-signing a loan carries with it a substantial fiscal responsibility and some potentially significant implications—especially when more and more debtors are insolvent and bankruptcy bound these days—as you're not just vouching for a person’s ability to repay a loan, you're promising to pay it yourself if they default.
In short, the most important implication to take into consideration in this economy is that a co-signor is ALWAYS responsible for a loan if the principal borrower defaults and files for bankruptcy. The process is explained in greater detail in the Federal Trade Commission (FTC)'s Facts for Consumers publication Co-signing a Loan. As a result, creditors and debt collectors have full legal authority to go after co-signors to pay the note. This fact can be especially painful when the co-signor/co-signee relationship is among family members— allowing the repercussions of debt to spread through several generations or branches on the family tree.
Now I know what you’re thinking. "That's fine. My (child, parent, extended relative or friend) is in good health, has a great job, and lives within their means. I’m assured they’ll make every single payment." Or maybe you’re the debtor, and you think, “but I’m responsible.” Yet, while all of that may be totally accurate, it’s also accurate that, in this economy, unexpected things happen everyday. People lose their jobs; cars are totaled; homes go underwater; they get sick or die unexpectedly. And, no matter the reason, good, bad, or otherwise, a co-signor remains liable for the costs, debts, expenses, or difference of the three. And unfortunately, co-signors often pay.
According to the FTC, “studies of certain types of lenders show that for cosigned loans that go into default, as many as three out of four cosigners are asked to repay the loan. When you're asked to cosign, you're being asked to take a risk that a professional lender won't take. If the borrower met the criteria, the lender wouldn't require a cosigner….In most states, if you cosign and your friend or relative misses a payment, the lender can immediately collect from you without first pursuing the borrower. In addition, the amount you owe may be increased — by late charges or by attorneys’ fees — if the lender decides to sue to collect. If the lender wins the case, your wages and property may be taken.”
As a result, before offering to co-sign or asking family and friends to foot the bills on what sees like overwhelming or insurmountable debt, you should first and foremost, seek financial counsel from a bankruptcy lawyer. Ironically, an attorney can be the best “judge,” of your assets and how dire your situation really is. And, if you do file for bankruptcy, an attorney can help you advise your cosigners so they have plenty of time to map out their strategy for also getting themselves out of your debt.
The bankruptcy attorneys at the Law Offices of John T. Orcutt offer a totally FREE debt consultation and now, more than ever, it’s time to take them up on their offer. Just call toll free to 1-888-234-4181, or during the off hours, you can make your own appointment right online at www.billsbills.com. Simply click on the yellow “FREE Consultation Now” button.