Responsibilities As A Cosigner

Nov. 5, 2012 - PRLog -- Any natural person who assumes liability for the obligation of a consumer (including, for example, a surety, guarantor or other accommodation party), and who does so without receiving goods, services or money in return for the obligation, or, in the case of open-end credit, without receiving the contractual right to obtain extensions of credit on the account, would be considered a cosigner for purposes of the rule.

If a person is asked to sign as a condition to granting credit to another individual, or as a condition for forbearance on collection of an obligation that is in default, such a person would be a cosigner, provided that the person assumes liability for a consumer's obligation without receiving goods, services or money in return. If the person who is asked to sign the credit obligation (for example, for the purchase of an automobile, or for an open-end credit card account) decides that he or she wishes to be reflected on the title to the automobile being purchased, or to have access to the credit card line, that person is not a cosigner.

When you cosign a loan for someone, you are helping that person obtain a loan that he or she would not be able to get on their own. You will be responsible for the loan if the borrower does not pay and you are also taking a risk that a professional lender will not take. The lender would not be asking for a cosigner if the borrower met the lender's criteria for making a loan.

In most states, if you do co-sign and your friend or relative misses a payment, the lender can collect from you immediately without pursuing the borrower first. If the lender decides to sue to collect and the lender wins the case, he or she may be able to take your wages and property. In addition, the amount you owe may be increased by late charges or by attorneys' fees.

Some states have laws that forbids a creditor from collecting from a cosigner without first trying to collect from the primary debtor. One such state is Michigan, in which the current law offers protection to a cosigner in the event the borrower defaults on the loan. Under Michigan State law, before the lender may report adverse information about the cosigner to a credit reporting agency or take any collection action against the cosigner, the lender must do both of the following:

a) Send the cosigner, by first class mail, a notice advising that the primary borrower has become delinquent or defaulted on the obligation and the cosigner is responsible for payment of the obligation.

b) Allow the cosigner at least 30 days from the date that the notice was sent to respond to the notice by either paying the amount due, or making other acceptable payment arrangements with the lender. If payment or payment arrangements are made, the lender may not report adverse information about the cosigner to a credit reporting agency.

To find out if your state offers additional protection for cosigners, check with your State Attorney General.

Studies of certain types of lenders show that for cosigned loans that go into default, as many as three out of four cosigners are asked to repay the loan.

Despite the risks, there may be times when you want to cosign. Your child may need a first loan, or a close friend may need help. Before you cosign, consider this information:

1) Be sure you can afford to pay the loan. If you are asked to pay and can't, you could be sued or your credit rating could be damaged.

2) A cosigned loan could affect your ability to borrow. Other lenders will consider your co-signed loan as part of your total debt load if you apply for another loan.

3) Before you pledge property to secure the loan, such as your car or furniture, make sure you understand the consequences. If the borrower defaults, you could lose these items.

4) Ask the lender to calculate the amount of money you might owe. The lender is not required to do this, but may if asked. You also may be able to negotiate the specific terms of your obligation. For example, you may want to limit your liability to the principal on the loan, and not include late charges, court costs, or attorneys' fees. In this case, ask the lender to include a statement in the contract similar to: "The cosigner will be responsible only for the principal balance on this loan at the time of default".

5) Ask the lender to agree, in writing, to notify you if the borrower misses a payment. That will give you time to deal with the problem or make back payments without having to repay the entire amount immediately.

6) Make sure you get copies of all important papers, such as the loan contract, the Truth-in-Lending Disclosure Statement, and warranties - if you are cosigning for a purchase. You may need these documents if there is a dispute between the borrower and the seller. The lender is not required to give you these papers; you may have to get copies from the borrower.

Under federal law, creditors are required to give you a notice that explains your obligations. The cosigner's notice states:

You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.

You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.

The creditor can collect this debt from you without first trying to collect from the borrower.* The creditor can use the same collection methods against you that can be used against the borrower, such as suing you,garnishing your wages, etc. If this debt is ever in default, that fact may become a part of your credit record.

This notice is not the contract that makes you liable for the debt.

Learn more at http://www.badcreditmd.com/responsibilities_as_a_cosigner.html