Can I Be Sued as a Co-signer?
If you agree to co-sign a loan, "you are just as responsible for the debt as the borrower," states the Indiana Legal Services website. That means the lender can come after you with all the weapons it uses to collect the debt. This can include garnishing your wages and foreclosing on your property.
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Reasons to Co-sign a Loan
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Despite the risks, there might be compelling reasons for you to co-sign a loan. Perhaps your son or daughter needs a loan for college. Or a car for college. If you are financially able to pay off the loan, it makes sense to co-sign for your son or daughter. If you have a friend who needs to borrow money for medical treatment, and you are well-to-do, it makes makes sense to co-sign a loan. The bottom line, however, is that you are on the hook if the borrower can't pay.
Reasons Not to Co-Sign
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The creditor may sue you first instead of going after the borrower. If the creditor suspects the borrower can't pay off the loan, he might conclude that it makes sense to sue a co-signer who has the deeper pockets. The creditor can legally try to collect the full amount of the loan instead of asking for you to continue to make payments. Creditors also can sue for late fees and collection costs. if the debt isn't paid by the borrower, it can hurt your credit rating as well as his.
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Bankruptcy
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If the borrower winds up in bankruptcy court and has the loan discharged, in most circumstances the creditor still can come after you for repayment. In fact, a bankruptcy proceeding might hurt your credit rating even if you pay off the loan. However, you might have some protection from claims against you by creditors in certain bankruptcy proceedings, especially if the borrower is a former spouse. Consult an attorney as soon as you are informed of the bankruptcy proceeding.
Considerations
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Federal law requires the creditor to give you written notice of your responsibilities as a co-signer. You should receive the notice before you co-sign for the loan. if you don't receive the notice before you co-sign, you might be off the hook.
Don't be guilt-tripped into co-signing a loan by a child or best friend unless you are fully prepared to assume full responsibility for the loan. If you can repay the loan, it might be better to loan the money directly to the borrower and avoid any potential damage to your credit rating.
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