If you have decided that co-signing a loan for a loved one wasn’t a good idea, you’re probably experiencing co-signers' regret. Removing your name from a co-signed loan won't be easy. For some debts, it may not even be possible.
Co-signing a loan or credit card basically tells the bank that you’re willing to make payments if the other person doesn’t. It also means the bank can pursue you for payment even if the other person files bankruptcy or dies before the debt is paid. By co-signing a loan, you assume responsibility for the debt just as if it were yours alone.
As a general rule, lenders won’t remove your name from a co-signed debt unless the other person has demonstrated they can handle the loan on their own. You never would have been asked to co-sign if the other borrower had shown this ability from the beginning. If things have changed since then, the lender definitely will want proof.
Removing Your Name From a Co-Signed Loan
If you co-signed for a loan and want to remove your name, there are some steps you can take:
- Get a co-signer release. Some loans have a program that will release a co-signer’s obligation after a certain number of consecutive on-time payments have been made. Sallie Mae, for example, allows student loan borrowers to apply for a co-signer release after 12 months of payments if credit and other requirements are met. Read through your loan documents to see if there is any type of program associated with your loan. Or, call the lender and ask if something like this applies to your loan.
- Refinance or consolidate. Another option is to have the other borrower refinance the loan into their name. To qualify for a refinance, the borrower needs to have a good credit history and enough income to make the new loan’s monthly payments. Consolidation is common with student loans. A qualifying borrower can use the consolidation loan to pay off the loan you co-signed. The original co-signed loan would still be listed on your credit report, but it should indicate the account is closed and paid in full. Payments—and nonpayments—on the consolidation loan won't affect you if your name is not listed on the loan.
- Sell the asset and pay off the loan. If you co-signed on a home or car loan and the other person isn’t making the payments as necessary, you may be able to sell the asset and use the money to pay off the loan. Your name must be on the title to sell the property to someone else.
Removing Your Name From a Credit Card
A credit card issuer may willingly remove your name from a credit card account if there’s no balance on the card. However, if there is a balance, you’ll have to pay it off before you can make these types of changes to the account:
- Transfer the balance. The other borrower may be able to transfer the balance to a credit card that’s in their name only. Once the balance is transferred, close the credit card so future charges can’t be made to the account. To keep future charges from being made, you can ask the credit card issuer to add a comment in their system indicating that the credit card account should not be reopened.
- Pay off the balance yourself. It won’t be fun paying a credit card balance you didn’t make and didn’t benefit from. However, paying the balance is better than ruining your credit rating and having debt collectors pursue you. You can even close the account or have the credit card issuer freeze the credit limit so no future charges can be made to the card, especially while you’re trying to get rid of the balance. Capital One, for example, provides a number to call for these services but stresses that joint account holders cannot be removed.
Removing Your Name From a Forged Loan
When a loved one has forged your signature on a loan, it puts you in a tough spot. You don’t want to be held liable for a decision you never made, but you also want to avoid having your loved one be arrested for forgery or fraud—something that could happen if you blow the whistle to get yourself off the hook.
Experian, one of the three credit bureaus, recommends reporting a forged loan to the Federal Trade Commission as identity theft.
Lenders won’t remove your name from a forged loan unless you report the forgery to the police or give them a signed affidavit including the forger's admission of guilt. Both put your loved one at risk of legal action. If you don’t let the lender know of the forgery soon after you find out, your silence could be interpreted as an acknowledgment. In short, to be liable for the loan unless you are willing to report your loved one's crime.
Protect Your Credit
If you can’t get the lender to remove your name from a co-signed loan or credit card balance, your best option is to at least keep up the minimum payments until the balance is paid off or until the other borrower can get the account in their own name.
Co-signing may not become an issue unless the other person isn’t keeping up with the payments, so get into the habit of checking the payment status, especially in the days leading up to the due date, on the due date, and the date after. Don’t wait too long because late payments go on your credit report after 30 days.
Frequently Asked Questions (FAQs)
Who can co-sign a loan?
Generally, anyone with a good credit score and the ability to repay your loan can be a co-signer. In most cases, a parent or other close relative is the most likely co-signer, but it doesn't have to be a family member.
How do I find out if my co-signed loan is defaulted?
You should always monitor your credit report for any red flags, and that's especially true if you have co-signed on a loan. If the person with whom you've co-signed is more than 30 days past due, it may show up as a negative mark on your credit report.
What happens when the primary owner of a co-signed loan files for bankruptcy?
When someone files for bankruptcy, any co-signers on their debt may or may not be protected, depending on the type of bankruptcy. In a Chapter 7 bankruptcy, co-signers are still on the hook for the debt. In a Chapter 13 bankruptcy, however, co-signers are at least temporarily protected during the initial stay while the bankruptcy case is examined. If the primary owner negotiates a lower debt payment, the creditor may seek to collect the rest from co-signers.