I received an e mail last week from a lady that was in a desperate situation. She had co-signed a student loan for a relative and had recently been notified that she must begin making a monthly payment of nearly $800 (since the student had defaulted). This is money she simply doesn’t have. While she thought she was doing a good deed helping a young person to obtain financing to go to college, she is now on the hook for nearly $10,000 per year in debt payments for the foreseeable future.
"A person devoid of understanding shakes hands in a pledge and co-signs for a friend." (Prov. 17:18)
I regularly receive e mails from people wondering about whether or not they should co-sign to help out a loved one or a friend. This can be for a student loan, auto loan, a mortgage, or even a credit card. While I was working in the mortgage business several years ago, it became apparent how little people understood about the financial and legal ramifications of co-signing. On numerous occasions I had to inform a client that their loan had been turned down due to a loan they had co-signed. In some cases, the loan was not being paid on time and it had destroyed their credit. In other cases, the addition of another monthly obligation caused their debts to represent too high of a percentage of their income for an approval. They all seemed to be in a state of disbelief saying, “but it is not really my debt…” Unfortunately, lenders do not see it that way.
1. You May End Up In Bankruptcy
When you co-sign on a loan, you are 100% responsible for repayment along with the primary borrower. If the loan payments are not made, the lender will attempt to collect from you and may ultimately obtain a judgment in court. Once a judgment is obtained against you, they may be able to force you to sell assets such as your home, vehicle, and other personal belongings, as well as attach your wages from your employment. As a result, you may have no other choice but to file for bankruptcy.
2. The Debt May Not Be Dischargeable In Bankruptcy
In the case of a student loan, most of the time you can not discharge this kind of debt in bankruptcy. What’s worse than ending up in bankruptcy? Being insolvent without being able to obtain relief from bankruptcy. A debt that can not be discharged in bankruptcy can potentially follow you for the rest of your life! Even in the case of debts that are considered eligible for discharge in bankruptcy, you must be able to qualify to file a Chapter 7 discharge bankruptcy. Under the new bankruptcy laws, you must meet a series of guidelines for the court to allow you to discharge any debt in bankruptcy. Otherwise, you may end up in a court ordered Chapter 13 bankruptcy (payment plan) for five years or longer.
3. You May Seriously Damage Your Credit Score
Even if the debt is being paid on time, it may still drive your score down. The addition of another loan on your credit file may cause you to have too many open credit accounts to maintain a high credit score. Of course, if even one payment is made late this will cause even further damage to your overall score.
4. Your Debt Ratio Will Be Impacted
When you apply for a loan, a lender will take into account the percentage that your monthly debts represent of your monthly income. Income to debt ratios are used in just about all forms of lending. They are considered as important as your credit score by mortgage companies, auto finance companies, and even credit card issuers.
5. Your Interest Rates May Increase
We have been inundated with e mails from individuals seeing substantial increases in the rate they are being charged on their credit cards. For just about any reason, credit card companies seem to be quick to raise rates on even their best customers these days. If a loan you co-signed for has even one late payment, you may see substantial increases in the rate you pay on any variable rate debts you owe.
The bottom line lesson here is to never co-sign unless you are fully prepared to pay back the debt yourself. This is what you may end up having to do in the end.
Helping you make the most of God’s money!