Co-Signing A Loan Could Put You On The Hook

You could become the “deeper pocket,” the next target of debt collectors come knocking, if the co-signer on your loan gets behind on payments. As Karin Price Mueller with the Star-Ledger reports, a reader sent in a question describing a relatively common situation:

“Several years ago,” goes the question, “I co-signed a loan for a relative. Six months ago, that relative declared bankruptcy. I was told the loan was finished and I had no further involvement. I now checked and my credit is a mess due to that loan. I have dropped 200 points in my credit score due to unpaid loan payment. Do I have any recourse now?”

The answer to that question is not much. The damage – at least in this reader’s case – has pretty much been done. So what’s the downside of co-signing on a loan?

  • The debt is added to your credit report, even though you’re not the primary payer on the loan
  • If the primary payer defaults or gets behind, your credit score suffers
  • If the primary payer dies and the lender forgives the debt, you, as co-signer, could get a hefty tax bill for debt forgiveness

As Mueller writes, the best bet is to not co-sign a loan – be it a mortgage or a car loan – in the first place, unless you have the financial means to pay it off if the worst-case scenario were to happen.

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Co-Signing A Loan Could Put You On The Hook