Will you be my cosigner? Part 1

Understanding the obligations of a cosigner.

Cosigning on a loan is more than a generous gesture. The cosigner’s signature is a guarantee to the lender that a debt will be paid. In most cases, cosigning does not grant the cosigner any rights of ownership to the property or merchandise. Part 1 of this two part series will familiarize you with the risks of cosigning for a loan as well as federal legislation that offers some protection.

The Michigan State Attorney General wants consumers to know:

  • You could be liable for the total loan obligation.
  • Your credit score could be damaged.
  • If a lender sues and wins, your wages and property may be subject to garnishment or other collection actions.
  • Even if the loan you cosigned is not in default, your liability for the obligation may prevent you from obtaining additional credit.
  • The lender may pursue the cosigner for payment of a loan in default. Lenders are not required to first attempt collection against the borrower.
  • If a borrower declares bankruptcy and his debt is discharged by the Bankruptcy Court, the cosigner is still responsible unless they too file for bankruptcy.

Federal legislation has been enacted that requires lenders to provide the following notices to potential cosigners:

  • You are being asked to guarantee this debt. Think carefully before you do. You will have to pay the debt if the borrower does not pay the debt.
  • You may have to pay up to the full amount of the debt if the borrower does not pay. You may also be responsible for late fees or collections costs, which will increase the amount of the debt.
  • 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. These methods may include wage garnishment or lawsuits.
  • A defaulted debt may become part of your credit record. 

Part 2 of this series will discuss the precautions one should consider before cosigning and review laws in the State of Michigan that protect cosigners.

Michigan State University educators invite you assess your financial health and visit Michigan State University Extension.  In addition, Michigan State University offers money management and homeownership classes. For more information about classes offered in your area visit MI Money Health

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