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Don’t “Cosign” Your Good Credit Away

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.  

Cosigning is ALWAYS a Bad Idea

We understand how hard it is to say no, especially to a friend or family member.  Let me say this loud and clear, when a family member of a friend asks about cosigning a loan for them, RUN FOR THE HILLS! JUST SAY NO! DO NOT UNDER ANY CIRCUMSTANCES SIGN THAT LOAN!

No matter how sure you are that they won’t default on the loan, you may even feel it in your soul, DON’T DO IT.  If a lender is asking for a cosigner, there’s a good reason. It’s because they believe that the primary borrower won’t be able to make their financial obligations.  More often than not, the lender is right.

When it comes to cosigning, you’re being asked to guarantee a debt.  If the primary borrower doesn’t repay the debt, you’re on the hook for the debt and the creditor WILL come after you. You’ll be on the hook for late fees, collection costs, attorneys fees and the principal balance of the loan.  If the debt goes into default it WILL show up on your credit report. The bottom line is, cosigning is always a bad idea.

Cosigning is always a bad idea.  Have I made myself clear up to this point? Cosigning a debt puts you in the worst possible situation.  You receive no benefit from the loan you’re cosigning. You aren’t getting a student loan to improve your education, you’re not getting a house to live in and build equity in, you’re not getting that flashy new car to ride around town in. You’re just on the hook for all of it.  You can have you bank accounts and assets seized, your paycheck garnished, you could be subject to litigation and you could ultimately end up in bankruptcy.

We understand that it’s difficult to refuse to help someone you love.  Telling friends or family members no is one of the toughest things you can do. However, it may be the best thing you can do for your relationship.  Think about what your relationship will be like if your friend or family member defaults on the loan or even just misses a payment. That’s going to show up on your credit at a minimum and will likely bring your score down 20 or more points.  The damage that cosigning can do to relationships can not be understated. You’ll be left with a loan and a relationship that will be severely damaged from here forward.

If you’ve cosigned a loan with someone who has missed payments or defaulted on a loan completely and you find yourself on the hook for their mistakes the attorneys at Harmon and Gorove can help.  We are experts in dealing with these kinds of issues through the bankruptcy code.  Contact us today for a free, no obligation consultation about how we can help you get out from under these debts and get your life back.