What Happens When the Person You Cosigned for Doesn't Pay

A senior couple reads a bill
© Pawel Gaul / Getty E+

A family member or friend may ask you to cosign a loan for them – to get a house, buy a car, get a credit card, or even to rent an apartment. And because you care and your credit rating is good enough to qualify, you agree. In the ideal situation, the person you cosigned for makes all the payments on time, abides by the agreement, and the deal goes off without a single problem. However, too often, the opposite happens and the person defaults on the payments.

Worse, you may not find out until the account has become severely delinquent and the lender wants you to pay in full.

How Nonpayment on Cosigned Loans Affects You 

When you cosign, you’re not merely offering up your credit history for approval purposes, you’re actually making an agreement that you assume responsibility for the debt if the other person can’t afford to make the payments. So, if the other person misses a payment or defaults on the loan, you face all the consequences as though it were your loan, even if you received none of the benefits of the loan, i.e. you’re not living in the house or driving the car.

Loans and credit cards you’ve cosigned will be listed on your credit report. Any late payments will also be on your credit report and included in your credit score. The fact that you only cosigned the loan doesn’t look better on your credit report and it doesn’t ease the damage to your credit score.

If the account goes to collections, the debt collector will include you in any collection activity including calling you and listing the account on your credit report.

Either the lender or an assigned debt collector can file a lawsuit against you for any unpaid part of the debt, even without suing the person you cosigned for.

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

Any eviction, repossession, or foreclosure that results from nonpayment on the cosigned loan will be listed on your credit report as well. Even if you were never contacted for payment, these actions will unfortunately go on your credit record and follow you for the duration of the credit reporting time limit. Worse, they can keep you from getting a house or car of your own.

Should the other cosigner choose to file bankruptcy and the cosigned account is discharged, the lender can still hold you liable for the remainder of the balance. Talk to an attorney if this happens to you, to find out what options you have for dealing with the bankrupted debt.

Your Options If the Other Cosigner Stops Paying

Unfortunately, once the other person has started missing payments, your options for dealing with a defaulted cosigned 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 cosigned for can start making payments on their own.

With a house or car, you may be able to sell the asset and use the proceeds to pay off at least some of the loan. However, you’ll still be responsible for any balance still due if the sale price doesn’t cover the full 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. But, if they’re already behind on payments, the odds of their being able to qualify for their own loan are slim.

Alternatively, you may be able to refinance or consolidate the loan yourself if that will result in a lower, more affordable monthly payment.

You may choose to file bankruptcy if you simply can’t afford to pay for the loan, especially if you’re having trouble making your other credit card and loan payments too. Consult with a bankruptcy attorney before making this decision.

You can do nothing, but collection efforts will continue. The lender may sue you, especially for larger loans. The worse part is, if the lender sues you and wins, the person you cosigned for can walk away with pretty much no obligation to the loan.