I recently read an interesting article in a national news magazine about strategies for dealing with co-signed debt. The article contained ideas for extracting yourself from that situation. These strategies included obtaining a release from the co-signed debt, refinancing or consolidating the debt, and selling the collateral, if any, securing the debt. If the primary borrower has stopped paying the debt, you may want to explore these strategies to limit or eliminate your own liability to pay the debt.
How to Limit Your Liability to Pay the Debt
These strategies can be effective in dealing with co-signed debt but normally require the assistance of the person primarily responsible for the debt. For example, re-financing the debt would work well in a situation where the primary borrower on the debt is sufficiently creditworthy to take on the debt for herself. Obtaining a release from co-signed debt is sometimes available for student loan debt. However, this would also involve the primary borrower taking on the debt for herself. If the co-signed debt is a car loan, for example, selling the car to pay off the debt would release the co-signer; but, might leave the primary borrower without a car or in a position to have to re-finance in their own name.
What to Do if the Primary Borrower Isn’t Paying the Debt
The above strategies are not the only way to deal with a co-signed debt. If you are reading this post because you are a co-signer for someone else and that someone else is not paying the debt, your best bet to protect yourself may be to pay the debt yourself, if possible. If you cannot do that and the lender is now pursuing you, it would be worth your effort to persuade the primary borrower to seek the advice of a competent consumer bankruptcy attorney.
It may be that the primary borrower needs to seek bankruptcy relief and you may be protected in the process. How is that possible? Well, if the primary borrower files a Chapter 13 case (a very common option for consumers overwhelmed by debt), you are protected in that case by something called the “co-debtor stay.” The co-debtor stay will protect you during the pendency of the primary borrower’s case so that you cannot be the target of any debt collection efforts on the co-signed debt. Note that no such protection exists if the primary borrower files a Chapter 7 bankruptcy case. In that instance, you would be responsible for the entire debt.
As you can see, the decision to co-sign a debt can have significant consequences for you if the primary borrower stops paying the debt. If you are considering the possibility of co-signing a debt for another, make sure you do your homework and thoroughly discuss the matter with the primary borrower. Have a back up plan ready in case things go the wrong way. Or, if things have already gone the wrong way, make sure you get competent legal advice. Don’t procrastinate in this situation. It will come back to haunt you.