Urban Legend #4 : Creditors Never Seek Collection From a Co-Signer

Keith Rucinski, Akron, OH
Chapter 13 Trustee

Every year, there are people who never went to college, but are required to pay on a student loan.

Every year, there are people who are required to pay for a car they do not own or drive.

Every year, there are people who have to pay on credit card debt for charges they never made.

Who are these people?

They are co-signers.

At one time or another, most people will be asked to be a co-signer to help a family member or close friend obtain a loan.  While helping others in need is something we should all strive to do, there are sometimes risks, especially financial risks, when helping others.

Many people mistakenly believe that creditors cannot seek collection upon a co-signer because the primary signer took out the loan.   The primary signer received the benefit of the loan and should be the person whom creditors seek repayment.  While that may be a valid, and moral assumption, it is not legally correct.

Once someone agrees to be a co-signer, and signs the loan documents, the law makes the co-signer equally liable for the debt.   Creditors do not even have to seek collection from the primary signer.   Creditors will often look to the party that is easiest to seek repayment.   Co-signers are the party usually easier for creditors to find and seek repayment.   Creditors often look to co-signers because co-signers often have reliable income and are more financially stable than the primary borrower.  In essence, the co-signer has guaranteed the loan and creditors have a legal right to be repaid.

Many people who have agreed to be a co-signer to help families and friends often find their wages garnished or their bank account attached by creditors who have obtained state court permission to garnish their bank account and garnish their wages.

Co-signers can seek reimbursement from the primary signer, but since the primary signer did not make or was unable to make the required loan payments, it is unlikely the co-signer will have any significant recovery of funds.

Unfortunately co-signers may eventually be forced to file bankruptcy when the wage garnishments and bank account attachments hinder the co-signers ability to pay their daily living expenses.   In some cases, bankruptcy will only provide temporary relief from the collection efforts by creditors as some debt may survive the bankruptcy discharge.   At the present time, student loan debt is a debt that may not be discharged in bankruptcy, which will allow creditors to restart collection against the co-signer once the bankruptcy case is over.

Everyone needs a co-signer at some point in their life when they have no credit history.  However, before becoming a co-signer one needs to understand the financial and legal risks to themselves, and weigh those risks against the reliability of the person needing help.