Young couples who have moved into their own place and have good jobs may be feeling generous. As a result, they may co-sign for family members and friends who don't have enough income or high credit scores to get loans and credit cards on their own. The problem is that co-signers can get stuck with paying their current debts, in addition to debts linked to their co-signed accounts.
Debt Risks
Lenders and creditors can require co-signers to repay an entire loan or credit card balance if the primary borrower or cardholder doesn't pay the debt. They also can require co-signers to pay off late fees. Lenders and creditors may sue a co-signer to collect the primary account holder's delinquent debt. In such cases, a co-signer’s wages may be garnished to pay off the debt if a company wins a debt collection lawsuit against him.
Late Payments
Sometimes creditors and lenders pursue a co-signer for payment first if the primary account holder misses a payment. Some states don't allow companies to collect late payments from co-signers without first trying to get primary account holders to pay up, according to the U.S. Federal Trade Commission. Debt collectors often pursue co-signers for payments first, because they usually have higher incomes than primary account holders.
Secured Loans
A lender may require a co-signer to pay off a primary borrower's debt, even if the debt is secured by collateral. For example, a co-signer may have to pay off a car loan if the lender chooses not to repossess the vehicle. A co-signer may even have to pay for a repossessed car if the lender can't sell the vehicle to recover the balance on the loan.
Bankruptcy
Someone you co-sign for could discharge the co-signed debt in a Chapter 7 bankruptcy, leaving you responsible for repaying the debt. All collection activities must stop against a Chapter 7 bankruptcy filer, but that protection doesn't extend to the filer's co-signers. Chapter 7 bankruptcy filers could voluntarily continue to make payments on their co-signed debts so that their co-signers aren't stuck with paying off their bills. However, they aren't legally obligated to do so.
