The Dangers of Co-Signing for Debt
Posted on Monday, August 24th, 2015 at 4:35 pm
Everyone knows it is dangerous to co-sign for debt. Often, relatives with good credit ratings are asked to co-sign for relatives with bad credit ratings or too little credit. If one person defaults on the debt, then the other is responsible for the loan. It does not matter that the original person is available to be sued or garnished; the lender has the option of going after either co-signor, at any time, for any reason, once a payment is missed. What many of our Northern Kentucky clients do not understand is the impact this will have on their credit and their ability to discharge the debt in a bankruptcy.
Effect of Co-Signing on the Innocent Co-Signor
Let’s assume Cincinnati wants a car, and Kentucky (who has good credit) co-signs on the loan. Cincinnati has the car in his or her name. Cincinnati then defaults on the payments. The car lender is now calling Kentucky and wanting to sue. What are Kentucky’s options?
Obviously Kentucky, as the co-signor, has the options to start making the payments, but most people don’t have the cash to pay for a new car they don’t even own. If a lawsuit is filed, the innocent co-signor’s wages can be garnished, bank account can be garnished, or a judgment lien could be put against his or her home. The co-signor can file a bankruptcy to discharge the debt. Even though a lien against a car is typically secured, since Kentucky doesn’t own the vehicle this debt is unsecured the lien is unsecured as far as Kentucky is concerned. That means the debt can be discharged in a Chapter 7 bankruptcy. However, the bankruptcy will hurt a co-signor’s credit rating just as if the debt belonged to the co-signor directly. Further, all the co-signor’s debts will have to be included in the bankruptcy, not just the co-signed debt. In short, none of the co-signor’s options are particularly good.
Where student loans are involved, the co-signor’s options are even worse. In Northern Kentucky, parents are often asked to co-sign on student loans. This is very dangerous! A student loan cannot be discharged in bankruptcy, regardless of whether it is federal or private. Private student loan lenders are aware of this, and creditor harassment in pursuing collection on a private student loan is common. Like with other loans, the student loan lender can pursue garnishment against wages or a bank account, can put a judgment lien against assets such as a house or a car, and – in the case of a federal lender – can even seize tax returns.
For this reason, co-signors on a student loan must file a Chapter 13 bankruptcy to avoid garnishment or attachment of a judgment lien. This means the co-signor must be in a bankruptcy for three to five years and make payments on the student loan to get it paid off. This is difficult for anyone, and can be impossible for some depending on the size of the student loan on the amount of the co-signor’s income.
Think Before You Co-Sign on a Debt!
Not every co-signor gets stuck footing the bill. If you find yourself in trouble because you co-signed on a debt, let us help. Lawrence & Associates takes pride in represeting Northern Kentucky and Greater Cincinnati residents just like you. We are Working Hard for the Working Class, and we can help. Call today!