What Happens When the Person You Co-signed for Doesn't Pay?

Unhappy man and woman read a past-due notice on a cosigned loan

Pawel Gaul / Getty Images

A family member or friend may ask you to co-sign a loan for them—to get a house, buy a car, obtain a credit card, or rent an apartment—and you agree. In an ideal situation, the person you co-signed for makes all the payments on time, abides by the agreement, and the loan is paid off with no hiccups.

But another possibility is that this family member or friend defaults on the payments. Worse, you may not find out that the loan has gone into default until the account is severely delinquent and a lump sum is needed to get caught up again.

Such a delinquency will show up on your credit report and affect your credit. You are held just as liable for the loan as the person you co-signed for. You would not only have to assume the payments but deal with your lowered credit score at the same time.

You're Responsible for the Debt

When you co-sign a loan, you’re not merely offering up your credit history for approval purposes. You’re agreeing to assume responsibility for the debt if the other person cannot make the payments.

Because you're agreeing to be responsible for the loans you co-signed, you face all the consequences of missed payments or loan defaults. It's the same as if you'd defaulted on a loan you took out on your own.

Because you are liable for the loan payments, your credit is also at risk. Any loans and credit cards you’ve co-signed for will be listed on your credit report. Also, late payments will be listed and included in your credit score. The fact that you only co-signed for the loan doesn’t matter.

If possible, ask the lender to notify you if the main borrower misses a payment. Of course, it may already be too late.

You May Be Sued

The lender can file a lawsuit against you for any unpaid part of the debt, even if they don't sue the person you co-signed for. Or they may sell your debt to a collection agency, who then tries to get back as much as they can by suing you.

Even if you were never contacted for payment, these actions will go on your credit record and follow you for the duration of the credit reporting time limit, except in states where notices to the co-signer are required by law.

If the lender wins the lawsuit, a judgment will be entered against you. If you can’t satisfy the judgment in full, the lender or collector can file to have your wages garnished until the debt is paid in full.

Try to Catch Up on the Payments

Unfortunately, once the other person has started missing payments, your options for dealing with a defaulted co-signed loan are limited.

If the loan payments are behind, but the loan hasn’t defaulted yet, you can prevent more severe actions by catching up on the payments yourself.

To protect your credit and prevent a lawsuit, you may have to cover the monthly payments until the person you co-signed for can start making payments on their own.

Refinance or Consolidate the Loan

Depending on the other person’s credit history, they may be able to refinance or consolidate the loan so that it’s in their name only. However, if they’re already behind on payments, the odds of them being able to qualify for their own loan are slim.

Should the other co-signer choose to file bankruptcy and the co-signed account is discharged, the lender may still hold you liable for the remainder of the balance.

Since you'll be responsible for ensuring that payments continue, you may be able to refinance or consolidate the loan yourself if that will result in a lower, more affordable monthly payment.

Ask for a Cosigner Release

Sometimes, a lender may allow for a cosigner to be released from the loan agreement if the original borrower successfully makes a number of consecutive, timely payments. If that borrower is deemed likely to continue to make payments, the lender may agree to release you from the loan. It's worth checking to see if your lender offers this possibility, but even if so, it will require the person you cosigned for to turn their finances around and make the payments as agreed.

File for Bankruptcy

If you wind up in a situation where the loan you co-signed for overwhelms your finances, you might choose to file for bankruptcy. It's an extreme solution, with long-ranging consequences, including a lowered credit score and difficulty obtaining future loans, not to mention higher interest rates. Your personal property may be required to be sold off as well.

You may wish to consult a bankruptcy attorney to determine whether this is the right step or whether there are other avenues you haven't explored yet.