During a consultation, clients may need to discuss how they can deal with a cosigned debt. It might be that they want to untangle themselves from a cosigned debt or it might be that they need to protect someone that has co-signed a debt obligation for them. Or, someone may say, “Well, my sister signed first and I signed second.” It is generally at that point I try and explain that as far as the creditors are concerned, it doesn’t matter who signed the obligation first or second, both who signed are equally responsible. If the loan was for the benefit of the sister and she was making payments but later defaulted, the creditor will begin collecting from the cosigner and vice-versa. Either way, if one defaults, the other will be considered by the creditor as “Plan B” and be called upon to step up to the line and finish the race.
This is the point at which I begin my short coaching on the pitfalls of cosigning for a debt (whether you are the “primary” or the cosigner). The creditor is banking on one of the parties defaulting on the loan thereby leaving the cosigner as the responsible party. Most of the time, someone will explain to me that the creditor advised that the cosigner is necessary for a better interest rate. But make no mistake about it, the cosigner is necessary so that there will be TWO people to collect from if or when there is a default. Additionally, and in the majority of the cases, obtaining a “better” or “lower” interest rate has absolutely nothing to do with the need for a cosigner. The creditor is likely in the “high-risk lending” business and the interest rate will be the same, cosigner or not. There will now be two or more persons responsible to pay 18%, 24% 32% or 49.60% interest! Yes, those are actual interest rates on actual contracts drawn up by actual creditors or lenders, or should I say, predatory lenders. It’s appalling to see numbers like those listed above.
Dangers of Cosigning a Loan
If you are asked by someone to sign with them for a debt, I don’t care if it is a beloved family member or dearest friend, don’t do it!! Further, I advise people that it’s always best to keep in-laws as in-laws and not make them outlaws by asking family members or even best friends to co-sign a debt with you.
The problem that you face is that once you have signed the dotted line, there is no undoing! You will be stuck. You will need to pray that nothing ever happens to that family member or friend you cosigned with. But if something does happen, get ready for your phone to start ringing, or worse yet, you may be served with a lawsuit or garnishment for a debt you didn’t realize had defaulted. Often, clients sit across my desk in shock because they never even knew that payments were not being made on the loan and now they find themselves scrambling for a resolution.
Protecting a Co-Signer
On the flip side, if you have asked someone to cosign with you and they graciously agreed to do so and now you find yourself in dire need to resolve debt problems but do not want to negatively affect your cosigner, there are some options. One of the best courses of action to take may be to file a chapter 13 plan wherein we can “special class” the cosigned debt and offer to pay the debt in full at the full contract rate of interest in order to protect the cosigner. This means that at the end of the case, the debt plus the interest will have been completely paid, all the while protecting the cosigner from collection efforts during the pendency of the case. It is the best “win-win” for everyone involved.
Of all of the scenarios I have seen, probably cosigned debts are the most agonizing for all parties involved. But, none of us can undo the past. It is always best to seek legal advice from one of our attorneys for your situation. All of our attorneys are very understanding and will offer practical solutions that will best suit you. Whether you are trying to get “released” from an obligation for a debt you cosigned or keeping your cosigners protected, whatever your goal we can help you. Don’t hesitate to contact us!
Suzanne Shinn is a shareholder of several of the Bond & Botes Law Offices throughout Alabama and Mississippi. She holds a Bachelor of Science from the University of Alabama, Birmingham, and a Juris Doctorate from the Birmingham School of Law. She joined the Bond & Botes team in 1992 as its first associate attorney and has been helping clients navigate the bankruptcy process ever since. Read her full bio here.