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.
References
Writer Bio
Frances Burks has more than 15 years experience in writing positions, including work as a news analyst for executive briefings and as an Associated Press journalist. Burks has banking and business development experience, and she has written numerous articles on consumer issues and home improvement. Burks holds a bachelor's degree in political science from the University of Michigan.