Avoid the Pitfalls of Cosigning

Do not cosign for anyone; it’s not worth the trouble. When you do, you will avoid the pitfalls of cosigning. The very term “Cosign” screams danger. It means 2 or more individuals in agreement to fulfill a financial obligation set by conditions in thereof. All too often, the person co-signing is stuck with the damage after the primary member doesn’t live up, for one reason or another, to their end of the deal. Sure, they had all the intentions on not sticking it to you. Nevertheless, when it happens (and 9 times out of 10 it will), you cannot help but have some animosity towards that individual. That’s the reason why I strongly discourage cosigning for anyone.

Rowing on a CreekImagine you and a trusted friend were canoeing together on a large creekbed, enjoying the beautiful scenery, listening to the calming roars from the stream. As you closed your eyes, taking it all in, you heard loud splashes as the boat rocked. It was none other than your friend, who got out of the boat with both paddles in his hand! How are you now? No doubt at that moment, you’re no longer at peace but are now experiencing mixed emotions towards your friend and the circumstances he placed you. He left you “up the creek without a paddle.” Co-signing for a close friend is no different!

Do you not still see the dangers why? Let me count the ways.

  1. If he doesn’t pay, you must! Otherwise, a late payment will hurt your credit-worthiness. And because of this, it may take longer to pay off the loan.
  2. You ARE responsible for the loan, even if you’re NOT the primary member. Worse than not paying on time is not paying at all. If Stevie or Mary defaults on the loan, the creditor has a legal right, and obligation, to hold you accountable for the remaining balance. By the cosigner defaulting on the loan, it can lead to a domino effect…read on.
  3. The creditor will sue you. Usually, the lender is willing to make arrangements if they see that you want to resolve any outstanding balances responsibly. But if they do not see anyone making an effort to rectify the issue, they will sue you. Unfortunately, they will sue you first since they will have a better chance of getting paid (since you have the better credit).
  4. You could have your wages garnished. Do you understand the implications of garnished wages? Imagine that you are bringing home $2,000.00 every month, after taxes. If the judge grants the creditor to take 10-25% of your pay,  at minimal, $200.00 will come out of pay. You can see how this can have a significant impact on your other expenses.
  5. You could face tax liabilities. Yes, co-signing can even affect your taxes. How? Consider: To avoid having your wages garnished, you and the creditor agree to settle the debt. Whatever the difference after the settlement, you are held liable. So, if a $20,000 debt was settled for $5,000, this is great news to your bank account, but Uncle Sam may expect you to report the $15,000 difference as “debt forgiveness income” on your tax returns.
  6. Your credit-worthiness will be affected. Not only will a late payment affect your credit score, but if the loan has defaulted, a lien or garnishment filed, the primary’s car repossessed, a foreclosure on a home or anything negative occurs from the main party not fulfilling their obligation, it will affect you. These penalties will prevent you from receiving any credit approval, or at the very least, a loan will have high-interest rates.
  7. Relationships will be damaged or destroyed. Ultimately, the trust you had with your friend or relative will suffer. A relationship could suffer because you are suing them for retribution, or because they may feel like that you are accusing them of being shady. Whatever the reasons, the relationship will become strained; and don’t think for a second that it will stay between you and him. Others will take sides after discovering what happened, which in itself can lead to an unnecessary war.

These are some of the reasons why you shouldn’t co-sign for anyone.

But still, you may have other questions regarding co-signing. What about co-signing for my child or my spouse? I want to help my friend; they need a car. What should I do? In my next post, I will share with you some helpful tips that will be like having a spare paddle, in case you find yourself “up the creek.” See you then!

-Ryan

Source: Consumer Financial Protection Bureau (www.consumerfinance.gov)

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