A co-signer shares responsibility for a debt and may be liable if the other party defaults. Loans may require a second party if the applicant does not have sufficient record. It is important to think carefully before agreeing to take responsibility for a debt.
A co-signer is a party who shares responsibility for a debt and may be liable if the other party defaults or goes bankrupt. The co-signer must accept shared responsibility and cannot add to a debt without prior consent or agreement. The identity of all debtors can be important in the case of collection proceedings, and people should think carefully before agreeing to take responsibility for a debt, even if they think the original debtor is unlikely to default. .
Loans may require a second party if the applicant does not have sufficient record. Parents often serve as co-signers 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 getting the money back, so he asks for a co-signer on the loan. Similarly, people with low credit risks can find a debt partner to access better interest rates and terms.
Under the terms of the debt agreement, the primary debtor is responsible for payment, but if payments stop or a problem arises, the creditor can search for the co-signer. In case of default, the co-signer is responsible for the balance of the debt. This can be extremely risky with a mortgage or other large loan, since the co-signer may not have access to the funds to pay it off.
In some types of bankruptcy proceedings, creditors can immediately contact co-signers and require them to assume the loan. With others, as long as the debtor makes and maintains a payment plan, the co-signers will not be liable. In the United States, for example, Chapter 13 bankruptcy provides a co-signer stay, preventing creditors from pursuing other parties to a loan. Only if the bankrupt party defaults on a payment agreement can he take steps to recover the debt.
When you are asked to become a legal debtor, it is important to think carefully. The legal responsibility of a loan can become a serious problem. If the borrower defaults, the co-signer may be at risk of being on the repayment hook. Non-payment may result in a black mark on the credit file. 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 Asset.
Protect your devices with Threat Protection by NordVPN
