What happens if I ask someone to co-sign a loan and then cannot make the payments?

There are many reasons someone may require a co-signer for a loan, if you have a poor credit, or maybe you are a college student with very little credit, or you are on the border of qualifying on your own based upon the debt to income ratios. In a lender’s eyes, a co-signer adds legitimacy and lessens the risk of their loan. Bank are in the business of making money so having an extra individual who is responsible for the loan gives them a little more piece of mind.

Who should you ask to cosign?

As you might have guessed college students typically turn to their parents. However, if you are asking someone to co-sign for your business, you will need someone who is financially stable enough and has good enough credit to make it work.   Depending on what they will be co-signing for, another consideration is if they have any business experience, specifically in running the type of business similar to yours.

What happens to the cosigner if I don’t make my payments?

Having someone you know co-sign for a loan makes them legally responsible to make the payments you can no longer make. In turn, their credit score will be affected if they cannot make those payments and the account goes to collections.  This is a terrible situation to get into. Having to tell someone who has trusted you to make these payments can be extremely difficult and filled with emotions.

If neither party is unable to make payments, the next steps will be for the Lender or an assigned debt collector to file a lawsuit against both you and the co-signer for any unpaid part of the debt. If either party chooses to file bankruptcy and their account is discharged, the lender will more than likely still hold the other party liable for the remainder of the balance. We always recommend speaking to an attorney early on so you know the right steps to take.

Prior to having the loan go to collections, some avenues you can consider are: selling the asset and paying off the loan; transfer your interest to the co-signer; or see if the co-signers’ credit will allow them to refi the existing loan, or get a new loan.     Another option is to ask the lender to restructure the existing loan by adding payments to the end or maybe ask them to make lower payments for a designated time period and add the balance of those payments on to the end of the loan.

Either way, communication is the key in these situations. Although it is a hard conversation to have, it will be better in the end if you address it sooner than later.

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