When Does a Cosigner Have to Pay?
You should never co-sign a loan agreement that you aren't willing to pay for in the event the person you are signing for cannot pay. As a co-singer, you are just as responsible for paying off the debt as the borrower who will be enjoying the benefits of whatever service you have co-signed for.
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When Can Collection Occur
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In some states, financial institutions are allowed to collect debt from a co-signer without first attempting to collect the debt from the primary party. This means that the creditor can collect from you at any time if you have co-signed on someone's debt. The alternative to a typical loan with a co-signer is a guaranteed loan. With guaranteed loans, a creditor can only come after the co-signer once the borrowing party has actually defaulted.
What Can Happen
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When co-singing, not only are you personally responsible for the entire balance of the loan, you will also be responsible for any late fees incurred if the borrowing party does not make timely payments. Additionally, failure to pay when requested can result in court action, negative credit ratings, wage garnishment and the seizure of your property.
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Considerations
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For co-signed loans that go into default as many as three out of four co-signers end up being held responsible for the balance of the loan and any additional charges incurred. Because it is very possible that you will end up being responsible for the loan, you should never co-sign for a loan you cannot afford to pay off.
Limiting Liability
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Although the creditor can collect from you at any time, there are several steps you can take to limit your liability. Before you co-sign an agreement, request that the lender only hold you liable for the principle of the loan if the borrower defaults and send you written notice every time the borrower fails to make a payment on the loan. Additionally, if the creditor is already trying to collect from you, you may be able to negotiate a one-time payment that is lower than the total balance owed in order to discharge the debt expediently.
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References
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