Co-Signed Loans: An Old Problem that is Making a Comeback

When I first began working in the consumer bankruptcy field, co-signed loans were a common problem that I saw often.  Then credit standards loosened and I rarely saw clients who were co-signers or who had co-signed loans.

Now the personally guaranteed co-signed loan is making a comeback.   I can state without reservation that in both a personal and a business context, agreeing to co-sign a loan for someone with poor credit is never a good idea.

In the current market, standards for consumer credit are tight and securing credit approval can be a challenging feat for someone with mediocre or poor credit.   Because of the tightening credit market and increased regulation by the federal government on lenders, people who may have been approved in years past are now needing others to co-sign in order to take out a loan.

If you are someone with good credit, consider this a warning to think twice before serving as a cosigner.  When close friends or loved ones approach you, understand that as much as you may want to help them, serving as cosigner for someone with poor credit can directly affect your credit, make you vulnerable to a lawsuit, and ruin your financial well-being.

You would be surprised by how many clients I have represented who found themselves filing for bankruptcy – not because of their own debt, but because their co-signee failed to make their payments.  Realize, when you agree to serve as a co-signer, essentially you are taking personal responsibility for the primary borrower to make payments.  If he or she fails to do so, you are liable for the debt if the borrower defaults.

If your friend or relative files for bankruptcy and gets the debt discharged in his bankruptcy case, you may find that the creditor will look to you for full or partial repayment.

Needless to say, finding yourself personally liable for a friend or relative’s debt makes for broken friendships and strained family relations.

Ultimately the decision to co-sign on a loan is yours.  If you are even considering it, make sure you fully understand the consequences and repercussions that can affect your credit and financial situation should the primary borrower default.