Can You Get Out of a Co-Sign Agreement?

by Jessica McElrath, Demand Media

    If you co-sign a loan for a friend or family member, the first thing you need to understand is that it's very difficult to get out of the agreement. A co-signer, just like a primary borrower, is obligated to pay off the debt. A lender is unlikely to release a co-signer unless there is a very good reason, such as the co-signer files for bankruptcy or the primary borrower refinances the loan without the co-signer. In most cases, when a person co-signs a loan, the lender will not release the co-signer from the obligation to pay the debt, especially if the primary borrower fails to pay as required.

    Co-Signing

    A person who co-signs on a loan has the same responsibilities as the primary borrower. Normally, a borrower needs a co-signer for a loan if he is unable to receive approval on his own. This might be because the primary borrower has a negative credit history or does not have sufficient credit history. Co-signing on a loan or on some other type of credit obligates the co-signer to pay the debt in the event the primary borrower can't.

    Default

    The possibility that an unqualified borrower might default on a loan is the primary reason a lender requires a co-signer for approval. Even if the co-signer and the primary borrower agreed that the primary borrower would make the payments, the co-signer is responsible for making payment if the primary borrower defaults on the loan. That's because a private agreement has no bearing on the agreement with the lender. For this reason, it is unlikely that a lender will release a co-signer.

    Bankruptcy

    In some situations, it is possible for a co-signer to relinquish payment obligations if debt is discharged in bankruptcy. In Chapter 7 and 13 bankruptcies, once unsecured debt has been discharged, the co-signer will no longer be responsible for the debt. The co-signer’s bankruptcy does not relieve the primary borrower of its repayment responsibilities, however. The creditor can still demand payment from the primary borrower.

    Refinance

    Refinancing a loan might extinguish a co-signer’s obligation. If, for example, the co-signer is a borrower on a secured loan, such as a mortgage or a car loan, and the primary borrower refinances the loan, the lender might allow the primary borrower to eliminate the co-signer from the loan if someone else co-signs or if the borrower can qualify for the loan on his own. If it is an unsecured debt, such as a credit card, it is very unlikely that a creditor will allow a co-signer to remove his name from the account.

    About the Author

    Jessica McElrath has been a freelance writer since 2000. McElrath is the author of "The Everything John F. Kennedy Book" and "The Everything Martin Luther King Jr. Book." McElrath has a Bachelor of Arts in history from the University of California at Berkeley and a Juris Doctor from Santa Clara University School of Law.