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Knowing What You're Signing Up For When You Co-Sign For Someone Else

If you're getting ready to send your son or daughter off to college, the list of what they should bring with them may seem endless. But, what students usually need most is credit. That's why parents, grandparents, and family friends often consider co-signing for a student's loans or purchases. But do you really know what you're signing up for when you co-sign for someone else's debt?

Many co-signors think they are simply vouching for the borrower, but the truth is a co-signor is 100% liable for the debt. In other words, if you are a co-signor and the person you are "helping out" can't or simply doesn't pay, you are legally on the hook for the full amount of the debt and possibly even late charges and fees. It doesn't matter if the borrower is your own son or daughter, your grandchild, a sibling or a friend - if they don't pay then the lender is going to come after you and your assets. This happened to a client of mine. She and her husband are hard-working people who couldn't afford to fiancé their daughter's education outright. They had co-signed for her college loans, but when the daughter quit school part-way through, the lender demanded the parents immediately begin paying back the loan with interest. The daughter was, of course, responsible for the loan payments, but she didn't have a job and when she did get one she didn't make enough money to make the monthly payments. If the parents hadn't paid, the lender could have sued them, attached their wages, even taken their house because they had put it up as collateral for the loan.

There are other types of situations that require a co-signor as well. Renting an apartment can be especially risky if the lease has with more than one tenant. Many college students opt to live off-campus in an apartment with roommates. A landlord may require all the students living in the apartment to be on the lease, but only allow one parent to co-sign. Landlords do this so they will have one credit-worthy person to go after if the rent doesn't get paid or the apartment is damaged. You have to be really careful in this type of situation so that you don't end up on the hook for your child's roommates! If the rent or utilities don't get paid and you are a co-signor to the debt, you can always try and sue the defaulting roommates' parents, but without a legally binding agreement holding them responsible you may have a very hard time collecting. It is never too late to ask the other parents to put something in writing indemnifying you as co-signor!

You also need to be very careful when it comes to co-signing on a credit card. Keep in mind that you could be on the hook for the balance! Also, it is important to know that the credit card company can raise the card credit limit without telling you, leaving you on the hook for potentially more than you originally agreed to. Another thing to remember with cosigning for any sort of loan or credit, the debt will show up as a liability on your credit record - which could interfere with you getting credit you may later need. For example, if you have co-signed for your three kids' car loans and you need a loan or home equity-line for yourself, you may not qualify because you have too much debt in your name! If payments are made late they will show up on your credit report and your credit score will be negatively affected.

Before you do before co-signing on a loan or purchase, make sure you can afford to make the payments if the borrower doesn't. If you can't afford the payments, you probably shouldn't be co-signing. Ask the lender to agree in writing to notifying you if the borrower misses a payment. That way you will know right away if there is a problem - before your credit is affected. You can always go back and ask a lender to do this even if you have already co-signed for something. Also, make sure you get copies of all important papers regarding the transaction.

Under federal law, a lender is required to give you a notice that explains your obligations as a co-signor. The notice should be a separate document and should state clearly that you are being asked to guarantee a debt. This notice should be given to you before you actually sign any contract! Make sure the actual contract spells out what the lender can do and an estimate of money you may owe if the borrower doesn't pay. What happens if only or two payments are missed? Is there a grace period? If the terms are confusing, ask a lawyer to explain.

If you have already co-signed on someone else's behalf and they aren't making payments, take a deep breath and make some calls. Try and negotiate with the lender to see if you can get the balance or payments reduced, or the interest eliminated. Make sure you get a clean credit record as part of any deal you cut before you pay off the debt. Get that promise in writing and follow-up to make sure your credit isn't damaged. If you can't successfully negotiate on your own behalf, there are several good credit counseling offices like the National Foundation for Credit Counseling that you can contact. Most lenders are willing to work with you if they know are taking your legal obligations as a co-signor seriously. It is also important to set things straight with the person you co-signed for, even if it is a close family member or friend. Have them sign a promissory note with interest for the amount you are paying on their behalf and set up a definite time schedule for repayment. You did them a favor by co-signing, so it is only fair they do right by you!

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