How Cosigning on a Loan Can Lead to Bankruptcy
Most of us need a vehicle to get around, especially in a rural area. Or maybe a loved one needs some extra cash and is considering a personal loan.
When a person is not making a lot of money but needs to finance a vehicle or get a huge chunk of cash, they may ask someone with good credit to cosign for them. If you are asked to do so, you may feel obligated to help them, but you need to carefully consider the risks of cosigning.
Being a cosigner is not a minor thing. It’s a huge responsibility. You will need to guarantee this debt, so if the borrower doesn’t pay it, you will have to.
You may have to pay the full amount of the debt if the borrower does not pay. Late fees and collection costs may increase this amount even further. Your wages may be garnished, and you could even be sued.
Cosigning a loan can harm your credit even further. If the borrower makes late payments or defaults, those missed payments are reported on your credit report, damaging your credit score. This can make it harder for you to secure loans or favorable interest rates in the future.
Also, keep in mind that the loan appears on your credit report, which increases your debt-to-income ratio. This can limit your ability to take on new credit or loans for your own needs.
If you cannot keep up with the payments, legal fees, or other financial obligations caused by the cosigned loan, you might be forced to file for bankruptcy as a last resort. This will discharge the debt and protect you from further financial harm, but it is still a major event that needs to be carefully considered.
Avoiding Financial Risks
Cosigning a loan is a serious commitment. You will need to weigh the risks carefully and consider whether you can handle the financial burden if things go wrong. Here are some tips to avoid risks:
- Understand the terms. Know the full amount of the loan and repayment schedule.
- Assess the borrower’s reliability. Only cosign for someone you trust and who has a stable financial history.
- Communicate with the borrower often. Stay in contact with the borrower. Get regular updates about the loan and any payment problems they are experiencing.
- Emergency plan. Be prepared to pay the loan in full if necessary.
- Monitor the account. Stay informed about payments and account status.
Contact Us Today
If you are considering helping a loved one by cosigning on a loan, make sure you understand the repercussions. When they do not make the payments, they could end up in bankruptcy, and as a cosigner, you could suffer financially as well.
Debt is a serious issue that requires an effective solution. South Florida bankruptcy attorney Brian K. McMahon, P.A. can help you understand your legal options. To schedule a consultation, fill out the online form or call (561) 658-1789. We serve the West Palm Beach, Boca Raton, Port St. Lucie, and South Florida areas.