Personal Finance

Cosigners Beware, and Borrowers, Too!

I can’t count how many questions I’ve received during my time in private practice about cosigned loans. In the last week alone, I’ve had five people in various situations ask me about the legal ramifications of cosigning a loan, for the loan itself, the cosigner, and the primary borrower.

This article from MSN Money points out the unpleasant truth: if you cosign a loan, and the primary borrower defaults, you owe the money. End of sentence. So, what can you do? Don’t cosign, or at the very least, have a backup written agreement - a contract - between you and the primary borrower that in the event of default, you can use to protect yourself. And before you cosign, assume that the primary borrower is going to default - that you will end up paying for that car.

If you are the primary borrower and find yourself in financial distress, you have couple of issues you need to resolve. First, and foremost (because people always come first), come clean with your cosigner. Do not, under any circumstances, allow someone else to be the bearer of bad news. Talk to your friend or relative at the first hint of trouble and let them know that you’re aware of the problem, that you’re getting a handle on it and that you will keep them in the loop. Then, attempt to renegotiate with the lender. Deferments, payment plans, refinancing - all these are possible options. If you have a resource that can lend you a lump sum, see if there’s a chance the lender will settle for a reduced amount of principal. But if all else fails, you should consider filing for bankruptcy.
However, be aware that if the cosigned loan is secured by property - let’s say a car - then a bankruptcy case for the primary borrower will not extinguish the cosigner’s liability. While there is an automatic stay against proceeding to repossess the property or attempt to collect the debt that extends to the cosigner, that stay can be lifted by the court, and the lender’s rights with respect to the property continue in full force and effect. If the payments are not being made, the lender is entitled to the property (after proper notice and legal procedures are followed - i.e., foreclosure proceedings in SC). And while the discharge will extinguish the primary borrower’s personal liability for the debt (unless it’s affirmed), it won’t affect the cosigner’s personal liability.

These are complex issues, as you can tell, and the best bet is to see a bankruptcy attorney before making a decision to file. There are solutions. However, the best one might be prevention - don’t cosign (or ask someone to cosign) without a great deal of certainty that the cosigner will never be required to step in for the borrower.

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