[ad_1]
A co-debtor shares responsibility for a debt and may be liable if the other party fails to pay or files for bankruptcy. Loans may require a second party, but becoming a co-debtor can be risky, and people should think carefully before agreeing. Proof of income and support should be requested to show the risk of default is low.
A co-debtor is a party who shares responsibility for a debt and may be liable if the other party fails to pay or files for bankruptcy. The co-debtor must accept co-responsibility and cannot be added to a debt without consent or prior agreement. The identity of all debtors can be important in collection proceedings and people should think carefully before agreeing to take responsibility for a debt, even if they feel the original debtor is unlikely to renege on obligations.
Loans may require a second party if the applicant does not have sufficient record. Parents often act as co-borrowers on student loans, for example, because college students don’t have an established credit history and are an unknown risk. The lender wants to increase the chances of recovering the money, so he requests a loan co-signer. Similarly, people with low credit risk may seek out a debt partner to access better interest rates and terms.
Under the terms of the debt agreement, the principal debtor is liable to repay, but if payments stop or there is a problem, the creditor can seek out the co-debtor. In the event of default, the debtor is responsible for settling the debt. This can be extremely risky with a large mortgage or other loan, as the co-debtor may not have access to the funds to pay it off.
In some types of bankruptcy proceedings, creditors can immediately contact co-debtors and ask them to take out the loan. With others, as long as the debtor makes and maintains a repayment plan, the co-debtors will not be liable. In the United States, for example, Chapter 13 bankruptcy provides for a co-debtor stay, preventing creditors from pursuing other parties for a loan. Only if the bankrupt party fails to keep a payment agreement can he take action to recover the debt.
When asked about becoming a co-legal debtor, it’s important to think carefully. Legal liability for a loan can become a serious problem. If the borrower defaults, the co-borrower may run the risk of being on the hook for repayment. Failure to pay may result in a black mark on your credit record. It is reasonable to ask the borrower for proof of income and support, to show that the risk of default is low and that the loan is likely to be repaid.
Smart Assets.
[ad_2]