Cosigning a loan may not seem like a big deal. You are just using your good credit to help a friend or family member, so he or she can qualify for a loan. Maybe the loan is for a car, house or to pay for school.
While it is true, you are using your credit to help this loved one qualify for a loan, it is also true you are guaranteeing your loved one will continue paying this loan. If he or she does not, you will be held responsible for paying the loan.
What happens if the other person pays late?
According to The Balance, any late payments on the loan also affect your credit score. If your loved one consistently pays the loan late, your credit score will drop.
What happens if he or she stops paying?
The account will likely be sent to a collections agency. The debt collection agency will try to collect the past due money from you. They will call, email and may even try to collect the money from you in person.
If you do not pay or cannot afford to pay the balance, the lender or the collection agency could file a lawsuit against you. If they win, you must pay the money, or you could have your wages garnished to satisfy the debt.
What if they initiate repossession or foreclosure?
The lender or debt collection agency may also decide to repossess a vehicle or foreclose on a home. You may think this will get you off the hook. However, a foreclosure or a repossession on a loan you cosigned also goes on your credit report. This could prevent you from buying a home or securing a loan for something else.
What can you do if you already cosigned?
If you already cosigned a loan, a lender may remove you after the primary makes timely payments for 12 to 24 months. Your loved one might also be able to refinance and remove you from the loan if he or she has improved his or her credit and income.
However, if your loved one has stopped paying on the loan, there are a few options. You could see if the lender will let him or her refinance. This may be unlikely if he or she has stopped making payments. You could also try to refinance the loan.
The loan amount may prove to be too overwhelming. If there is no hope you or your loved can make these payments, it may be time to consider bankruptcy. In Chapter 7 bankruptcy, you discharge most types of debt, though you may have to sell off some possessions to do so. However, student loans cannot be discharged through bankruptcy. For Chapter 13, you restructure your debt through a repayment plan to submit to the court and your creditors.
Before you make any decisions, consider talking to an experienced bankruptcy attorney about your options. An attorney can advise you of the best possible way to handle your situation.