Why Co-Signing For A Debt is NEVER a Good Idea (Part III)

So we were last talking about what remedies there are for you if you make the mistake of co-signing for someone.  The short answer is not many.   Depending on what type of loan you co-signed for determines what options you have to get out of the obligation to pay.  Student loans are the hardest by FAR to get out from under; the only remedy is if the lender allows you to be taken off of the promissory note (the loan obligation).  Student loan companies almost never do this, but when they do, it’s only if the primary borrower has made long-term, consistent payments, AND has good enough credit to warrant letting you off the hook.  As mentioned in Part II, you’re responsible for a student loan even if you declare bankruptcy.  Other loans, such as car notes, etc. are similar; the lender has to agree to let you out of the obligation.  The only difference is that traditionally, you can get out of these loans if you declare personal bankruptcy.

But stop for a second and consider this: if you loaned a stranger with “sketchy” credit a large sum of money solely on the basis that a creditworthy person would pay that loan back if anything went wrong, would YOU let the creditworthy person off the hook?  I certainly wouldn’t.  Even if Mr. Sketchy Credit paid me back at the rate he was supposed to, and was never late with those payments, I’d make sure that I had a “Plan B” in case Sketchy lost his job, got a divorce, etc.   And that’s just me, an individual person.  Banks, which rely on consumer lending to pay their bills and make profits, do this as their business.   Their very existence depends on how good they are at assessing the risk of lending people money.  This leads me to my (next to) last point…

Institutions in the business of lending money to people have more to lose than anyone when they decide to approve a loan, especially to someone with poor credit.  Banks and other lending companies have spent countless dollars developing a credit system, paying lawyers, accountants, and other professionals to help them establish the most effective and efficient way to lend money without losing that money.   Don’t fool yourself into thinking that your ability to evaluate Mr. Sketchy Credit’s ability to pay back the loan is better than theirs.

Before you cast me out as another non-feeling, cold, calculating lawyer, allow me to say this: I know you care about the person asking you to co-sign; otherwise you wouldn’t be considering tying yourself to them financially for (what could be) decades.  But ask yourself this question before agreeing to do it:  who are you really helping by agreeing to pay someone else’s loan?  If your friend or loved one isn’t capable of paying back the debt, then you’re enabling them to acquire MORE debt.  So chances are you’re not helping them.  If you end up being responsible for the debt, then that’s just more stress for you.  But the lender…the lender always makes out, don’t they?  They get to lend money to one person, but ultimately have TWO people to harass for it if the loan doesn’t get paid back.

So rather than co-signing for someone, what can you do to really help a friend/family member in need?  If you HAVE to get involved financially, I would suggest either: (1) giving them the money outright; or (2) sign for the loan yourself, leaving the other person off of it completely.  If you aren’t willing or able to do either of those things, then just tell the person that you can’t help them.  Lie if you have to.  Don’t allow a lender (like a car dealership) to even run your credit.  NEVER co-sign for a student loan, no matter what the circumstances unless you’re prepared to have it for life.

But maybe I’m wrong, and I am being cold-hearted.  Is there a situation you can think of that would warrant co-signing for someone?  Let me know what you think.

Why Co-Signing For A Debt is NEVER a Good Idea (Part II)

Where were we? Oh, right.  We were talking about why co-signing is one of the biggest legal and financial mistakes you can make in your life.  I was explaining how someone you care about might be in dire need of some thing, a car, an apartment, a loan for school, and how you helped them out by allowing them to use you as a co-signor.  Initially, co-signing can appear to be a painless process, one that can make your loved one’s life significantly better.  But it often ends up making your life a living hell.  How so?  Well, let’s use our previous example about you co-signing for “S” (your significant other) for that car they desperately needed, and fast forward two years:

You and S have split up, and haven’t spoken in over a year.  In fact, you hadn’t really thought about S until lately, and that’s only because you’ve been getting phone calls from MM’s Used Cars Collection Agency four or five times a week for the last two months.  When you talked to them initially, they informed you that S hadn’t made a car payment in three months.  You offered to give them S’s phone number.  The MM’s agent told you that they’re not interested in talking to S, and they don’t have to talk to S at all to get their money.  They want YOU to pay the back due amount, plus interest.  You told them you couldn’t afford to give them that kind of money, to which they replied that the delinquency is going on your credit report.  You’ve tried calling S to get this straightened out, but S doesn’t answer.  In fact, you don’t know where S is living or how to find them.  Meanwhile, you’ve stopped answering the phone when MM’s Collection Agency calls.  Three months later, you go to a dealership to purchase a much-needed car for yourself.  You are declined because your credit has tanked due to the missed payments for S’s car.

And as horrible as all that sounds, it can be SO much worse.   A friend of mine co-signed for a (now former) girlfriend’s student loan.  What can be wrong trying to help someone get their education?   Plenty.  My friend ended up having to file bankruptcy (due to other issues), and tried to get the student loan discharged too.   However, he was quickly informed that student loans can’t be discharged in bankruptcy.  The loan, which is over $50,000, is now his loan, and he and this ex-girlfriend will be tied together until it’s paid off.  That’s even if she dies.  If she doesn’t pay (which she hasn’t), his credit takes the hit.   If he doesn’t pay, his credit takes the hit.  Obviously the ex-girlfriend’s credit will suffer too, but what does she care?  She had terrible credit to begin with.  So what do you do if someone you care about asks you to co-sign for them?  I have a few thoughts on that as well some possible remedies if you find yourself in a co-signed nightmare.  See Part III for the deets.

Why Co-Signing For A Debt is NEVER a Good Idea (Part I)

That’s right, I said it.  NEVER.  That’s pretty strong statement, isn’t it?  Lawyers are very careful about using words that convey absoluteness, because it is the rare case that circumstances call for such language.  However, I feel pretty confident in telling you that co-signing for someone else’s debt is always a bad idea.

First, what is co-signing?  Co-signing is simply this: signing a contract with a lender saying you will be legally and financially responsible for someone else’s debt if that person doesn’t pay it.  You might ask yourself, why would anyone do this?  Most of us have enough of our own bills to pay, who’s got the time or energy to worry about someone else’s bills, too?   A lot of people do this, and do it for different reasons.  Here’s a typical example:

Your long-time significant other (let’s call them “S”) needs a new car.  In fact, S needs a new car desperately – and if they don’t get one soon, they’re not going to have transportation (in a place like Oklahoma, that’s a big deal – there’s not a real public transportation system here).  You accompany S to MM’s Used Cars, where S finds a reasonably priced car – no frills, no frumps, just a dependable car.    The car is $12,000.  You and S sit down at the negotiating table with a MM’s salesperson, where they run S’s credit.  You soon find out that S either has terrible credit or no credit; regardless, S cannot qualify for the loan they need to get a car.  However, the salesperson begins to question you, and finds out that you have had a good job for the last six years, make decent money, and have never paid a bill late.  The salesman runs your credit and you have an excellent credit score.  The salesman asks if you would consider co-signing for S.  S looks at you, begging.  S promises that they will pay their bill every month, and this will never even be a problem for you – they just need a car.  You love S, so you cave in and sign the papers.  S has possession of a new(ish) car, financed for the next 72 months.

Although I used a boyfriend/girlfriend example, this situation presents itself in a number of different ways; “S” can be anyone; it might be your cousin, your best friend since second grade, your niece or nephew, or your child.  It may not be a car; it might be for an apartment, or worse yet, a student loan (more about that later).  The bottom line is, someone you care about needs or wants something that they can’t obtain without a co-signor (or a “guarantor” in legal terms), and you fit the bill.  Your loved one is happy, the lender is happy, and you’re happy.  What could be the harm in this?  Plenty…see Part II for all the gory details.