Agreeing to co-sign on a loan can be a great way to help a friend, sibling or child establish their own credit or receive a better interest rate. The problem with co-signing on a loan is that if the primary borrower begins missing payments, the liability will fall on you.
Before you agree to cosign on a loan, do your research to find out who will be liable if the borrower defaults on any payments. In most cases, the responsibility to pay the loan will be on your shoulders. Before signing anything, there are a couple things to consider.
Know that you are considered a borrower. Whether you’re reaping any of the benefits of the loan or not, you have still promised, in writing, that you will make sure the loan gets repaid. Also, be aware that your credit will most likely be affected. You are now considered a borrower and the loan will show up on your credit score. If payments are made late or missed entirely, your credit score will suffer.
Aside from the added worry of timely payments, you will want to make sure the loan won’t negatively affect your credit to debt ratio, which compares your credit limit to the debt you have. In reality, it will affect this ratio either way, but make sure it doesn’t tip you over into bad standing. Your credit to debt ratio affects your credit score and ability to take out loans of your own in the future.
What happens if the primary borrower files for bankruptcy? This is very important to know before cosigning. In the case of a Chapter 7 bankruptcy, some debts are deemed eligible for discharge and the debtor (your primary borrower) is protected from creditors trying to collect. In this case, as a cosigner you are not protected and most creditors will look to the cosigner to fulfill the debts.
In a Chapter 13 bankruptcy, you will receive more protection as a cosigner. Chapter 13 reorganizes debt under a structured payment plan. In essence, your primary borrower will be paying the debts off himself and you will only become responsible if they default on that payment plan.
If you are considering bankruptcy and have any cosigners on your loans, make sure you let them know ahead of time. They put themselves at risk by cosigning and they deserve to hear about the bankruptcy from you. In any event, if you are the primary borrower or cosigner, you will want to contact a Rio Grande Valley bankruptcy lawyer to find out more about the process and how it will affect you.
Jeff Davis is the Owner of the Davis law firm, and a highly experienced Harlingen, McAllen, and Edinburg bankruptcy attorney. To find out more information about a Rio Grand Valley bankruptcy lawyer, please visit www.jeffdavislawfirm.com.