Can I be held responsible for a debt that I co-signed?
Loan co-signers are at risk if the borrower fails to make payments.
Even with the best intentions, those who co-sign loans could find themselves embroiled in someone else's financial crisis.
Each co-signer to a loan takes on the same responsibility to repay the borrowed money on time and in full. If one of the signers finds themselves in dire financial straits and is facing the possiblity of filing bankruptcy, creditors can come after anyone whose name is also attached to the debt.
In some states, for instance, any jointly-owned bank account is considered to be the property of those whose names are listed on it. As a result, at least half the money would be considered the property of the person filing bankruptcy and viewed as available to repay creditors.
While that may seem like the co-owner of the account - who may not be in financial trouble - is no longer liable for debts of their bank account partner, they should consider a fine point allowed by bankruptcy law. The person who is in debt has the right to "rebut" their ownership of the money if they can prove that the other person on the account deposited most of the funds, according to Total Bankruptcy. That could leave the co-signer open to collection efforts by the creditor.
The same reasoning applies to any loan that becomes a delinquent debt. "You should never co-sign a loan," personal finance columnist Lynn Brenner told MSN's MoneyCentral.com. "If the primary borrower gets behind in payments, the bank will come after the person they have the greatest chance of collecting from. If they thought they had a good chance of collecting from [the debtor], they wouldn't have required a co-signer in the first place."
If the debtor files Chapter 7 bankruptcy, the creditor can be stopped from pursuing the debt because an automatic stay prevents collection efforts. However, if the debtor qualifies for a Chapter 13 case, which requires monthly payments to creditors, money in a joint account could be used for those payments.
In addition, those who co-sign a loan are at risk of having their own credit rating tarnished if the debt becomes delinquent. The creditor can also sue the co-signer for not only the amount of the loan, but also interest and penalties that may build up.
"And, if the document is like most loan guarantees, it allows the bank to charge you its own legal fees in collecting the debt from you," states Brenner.
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