So, you’ve gone and done it. You didn’t listen when we told you not to do it. You said to yourself, it’s OK, I know my brother won’t skip out on this loan and leave me holding the bag. Well, you were wrong and he did. Not only that but the truck loan he convinced you to cosign on was just wrecked and your brother also didn’t have insurance. You’ve got yourself in a mess. Here’s what happens to your credit now.
Your brother was late with his payment or he’s skipped one entirely. This is a big red flag. It’s also a big red flag to the credit ratings companies. Your credit score is going to get dinged, probably to the tune of 20-30 points. Honestly, even if your brother doesn’t miss his payments you’re still going to have credit problems.
One of the thing credit ratings companies look at is something called your Debt to Income Ratio. This is a measurement of how your income stacks up to your total debt load. Lets say your monthly income is $10,000 and your monthly payments on all your debts add up to $6,000. That’s a Debt to Income ratio of 60% and you’re now considered high risk. This loan you’ve cosigned with your Brother is factoring into that DTI of 60% and that’s hurting your credit score and your ability to get new loans at the best interest rates, or at all. So your credit is taking a hit for your brother and you don’t even get the benefits of having something to show for it.
OK, so back to the issue at hand. You’ve cosigned and now your on the hook. Here’s the best ways to avoid massive hits to your credit or the possibility of ending up having to file bankruptcy. First things first, monitor the borrower to make sure that their payments are on time and in full. This may mean you have to call them every month before the due date to gently remind them that the payment is due and make sure that they actually have the cash to cover that payment. This is a hassle, and why we told you not to cosign to begin with. This will most likely pay off for you though because it will hopefully keep you from finding out the hard way (like nasty calls from bill collectors) that your brother hasn’t been making his payments and keep him from damaging your credit for years to come.
The next thing you should do is assume that your brother won’t be able to make his payment at some point and that you’ll occasionally have to step in to make the payment in order to keep your good credit score. After you sign the loan you need to open up a separate savings account and place in that account enough money to cover payments for at least 6 months worth of payments. By doing this, you have a cushion built up in the event that your brother does what the lender thinks they’re going to do, quit paying the loan. This also protects you in the event that your brother absconds with the truck. It’ll give you enough liquidity to call the lender and try to work out a deal. It’ll still hurt your credit but it hopefully won’t drive you into bankruptcy.
If you were convinced to cosign and now find yourself in financial trouble because of that loan, don’t worry. We’ve given you a pretty hard time here today but in all honesty, people cosign all the time and it isn’t something that can’t be fixed. The attorneys at Harmon and Gorove have the ability to make these issues go away using the tools provided in the U.S. Bankruptcy Code. Our attorney have decades of experience in handling cases like this and we are willing and able to help you in your time of need. Contact us today to schedule your free, no obligation consultation with one of our attorneys.