Understanding Co-Signer Liability

Posted November 15th, 2009 by admin No Comments »

It was just that pesky credit report. What do they know any? In retrospect, the credit reporting agency knew more than the co-signer who faces a delinquent or default loan on property or assets they never enjoyed. The first question from most will be “Do I Owe?”

Co-signer Liability

“Many people believe that if there are two or three signers, they are only liable for one half or one third of the debt,” notes Wendell Schollander and Wes Schollander in “The Personal Bankruptcy Answer Book.”

This is wrong. The creditor can sue any of the signing parties on the loan document, either individually or collectively for the full amount owed on the debt. The co-signer has entered a legal contract agreeing to pay the debt in full if the primary-signer fails to do so. Be assured, the creditor will go after the person whom it determines will provide the best chances of recovery.

Too often, it is after the fact that a co-signer begins to learn about the co-signer liability and options . For instance, there are two rights that most co-signers do not exercise: 1) requesting lender notification of late payments and 2) limiting co-signer responsibility to the loan’s principle.

The Loan is Delinquent

A delinquent loan is one that is 30 to 60 days past due. The co-signer on a delinquent loan will find the delinquency on her credit report. It will also impact her credit score. One option the co-signer has is to pay off the delinquency amount directly to the lender and hope that the primary-signer steps up his game. For many, this is a hard option to swallow.

Another option is to ask the primary-signer to refinance the loan in her own name, says author Dave Ramsey in “The Money Answer Book”. The weakness of this option is that it doesn’t address the core problem: the primary-signer’s unhealthy financial situation was the reason a co-signer was needed in the first place. Refinancing the debt after creating a credit delinquency trail of 30, 60, or 90 days of late payments will not be looked upon favorably by a lender. It doesn’t, however, hurt to ask.

The Loan is in Default

According to Merriam-Webster Online Dictionary, a default is the failure to fulfill a contract, agreement, duty or financial obligation. This is beyond the delinquency stage. If the loan was secured by collateral — automobile and home loans are typically always secured by the purchased asset — then this is when the creditor will seek to seize the secured property to sell at auction to recover on the loan.

Any remaining loan amount not covered from the sell will still be owed by the debtor and any co-signers. This amount can be reduced to judgment and collection procedures such as bank levy or wage garnishment may proceed. It should be noted, however, that a judgment and enforcement can be sought against both secured and unsecured defaulted loans. The creditor’s collection options will primarily be governed by State laws.

A co-signer on a defaulted loan has the legal right to repossess the collateral if it can be found. The property can be retained and the loan can be paid off by the co-signer. The property can be sold and the proceeds can be used to pay down the loan. A co-signer can also file a lawsuit against the primary-signer to recover on losses sustained by the default.

A Hard Lesson Learned

There was a reason the primary-signer could not obtain a credit approval on the strength of his name alone. A co-signer on a loan is not just vouching for the primary-signer’s integrity, but agrees to pay the loan if the primary-signer fails to pay. This is an expensive lesson to learn after a delinquency or default has occurred. The co-signer’s financial fall-out can be mitigated by fully understanding co-signer liability and the legal options available against a defaulting party.

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