When the Person You Co-signed for Doesn't Pay
A family member or friend may ask you to co-sign a loan for them—to get a house, buy a car, get a credit card, or rent an apartment. Because you care about the person and your credit rating is good enough to qualify, 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.
All too often, the opposite happens and the person 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.
This affects your credit by reflecting on your report. You are held just as liable for the loan as the person you co-signed for. You will not only have to assume the payments but deal with your lowered credit at the same time.
Use Caution When Co-signing
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 can not 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.
The Debt Collector
Either the lender or a debt collection agency (debts are usually sold to a collector, who then tries to get back as much as they can) 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.
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.
Your Options If the Other Co-signer Stops Paying
Unfortunately, once the other person has started missing payments, your options for dealing with a defaulted co-signed loan are limited and none of them are ideal. 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.
Refinancing and Consolidating
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 payments continue, you may be able to refinance or consolidate the loan yourself if that will result in a lower, more affordable monthly payment.
If you wind up in a situation where the loan you co-signed is too much for your finances to handle, you may choose to file for bankruptcy. While this sounds extreme, it may be your only option.
If you find yourself in this situation, it might be in your best interest to consult a bankruptcy attorney to discuss your options.
Minnesota State Attorney. "Cosigning a Loan," Accessed Nov. 6, 2019.
Consumer Financial Protection Bureau. "What Is a Co-signer?" Accessed Nov. 6, 2019.
Federal Trade Commission. "Co-signing a Loan," Accessed Nov. 6, 2019.
Michigan Department of Attorney General. "Cosigning a Loan? Know the Risks!" Accessed Nov. 6, 2019.
Federal Trade Commission. "Complying With the Credit Practices Rule," Accessed Nov. 6, 2019.
Consumer Financial Protection Bureau. "CFPB Finds 90 Percent of Private Student Loan Borrowers who Applied for Co-Signer Release Were Rejected," Accessed Nov. 6, 2019.
National Consumer Law Center. "Deciding Whether to File for Bankruptcy: Consumer Debt Advice from NCLC," Accessed Nov. 6, 2019.