An applicant for a loan may need a co-signer if he does not have good enough credit, or if he has not established credit. However, co-signers can face serious consequences. The Federal Trade Commission reports that three out of four co-signers are asked to repay loans that go into default. Even if the primary borrower settles the debt, the co-signer may still be impacted.
A loan settlement is an agreement between a creditor and debtor in which the parties agree for the creditor to accept an amount that is less than the balance owed on the loan in exchange for considering the loan to be paid off. This tactic may be advantageous for borrowers who may have difficulty making continued payments, but who may be able to make a larger lump sum payment. Because both parties agreed to the original debt, the co-signer can still be required to pay off the remaining balance on the loan. The co-signer can also request to make a loan settlement on the account if he cannot afford to pay off the loan.
A co-signer is as liable for the debt as the primary borrower. If the primary borrower does not pay off the entire debt, it will be reported on the primary borrower's and the co-signer's credit report as a derogatory rating. This negative credit mark may lower the co-signer's credit rating and may impair his ability to acquire his own credit in the future.
The primary borrower and the cosigner are both subject to receiving collection calls from creditors who want to receive the payments that were promised to them. Once the primary borrower settles the debt, the collection agencies may turn all of their attention to the co-signer in an effort to collect on the remaining balance.
If you are a co-signer and the primary borrower settles the debt as part of a Chapter 7 bankruptcy proceeding, the creditor can still try to collect the debt from you. If the primary borrower reorganizes his debt pursuant to a Chapter 13 bankruptcy, you will be protected from the debt through a Co-signer Stay that prohibits creditors from attempting to collect from you or the primary borrower. If you file for Chapter 7 bankruptcy, you will include the co-signed debt as part of your debts.
Action Against the Primary Borrower
The implied agreement between a co-signer and the primary borrower is that the primary borrower will make the payments on the loan. If the primary borrower breaches this duty by refusing to make all of the required payments, the co-signer may be able to hold him liable. He may have a cause of action against the primary borrower if he is forced to pay the remaining balance on the loan.
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