Cosigning Dangers

Recently a parent wrote to me looking for help with a problem involving a co-signed debt. Seems she had agreed to cosign a loan to cover a dental procedure for her adult child. The amount wasn't large, though it wasn't insignificant either.

Once the dental office had her authorization, however, they approved a much larger line of credit and went ahead and completed much more extensive work. The patient couldn't pay, so Mom and Dad were now on the hook for a huge bill. They are outraged, wondering why they have no rights as cosigners.

Unfortunately, this is not the first story of that kind that I have heard. One parent told me they didn't discover that a car for which they had cosigned for their child had been repossessed until they were turned down for a mortgage because of the repo on their credit reports.

Another parent cosigned a credit card for her daughter and all was fine until years later when her now-divorced daughter's ex ran up a large bill on the card and skipped out.

Why don't cosigners have more rights?

Under the Credit CARD Act provisions that go into effect in February 2011, anyone under age 21 who wants a credit card must either show they have the income to handle it, or get a cosigner. If they do get a cosigner, the credit limit cannot be raised without the cosigners approval.

Shouldn't that protection be extended to all cosigned credit cards and loans? In addition, shouldn't cosigners have the right to be notified if the primary borrower misses a payment, rather than waiting until the loan ends up in collections?

If you have cosigned for a loan or credit card, weigh in on this one.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis.

Comments

[Deanna]

I can't count the number of times I've heard from a parent or relative that has cosigned on an account to help someone out only to have it backfire. I ALWAYS advise consumers to think twice before agreeing to cosign on a loan. Unfortunately, most people don't realize that when they cosign on a loan, they are basically agreeing to cover the loan in the event the primary borrower is unable to pay the loan. Even with the best of intentions one can never predict the unexpected: job loss, illness, or heaven forbid - death.

And yes, I strongly agree:

"Shouldn't that protection be extended to all cosigned credit cards and loans? In addition, shouldn't cosigners have the right to be notified if the primary borrower misses a payment, rather than waiting until the loan ends up in collections?"

If you're putting your name on the line and are being held accountable for the loan, then there should be a law that requires lenders to notify the cosigner if the primary borrower misses a payment or is delinquent. And the same goes for increasing a credit limit w/o the cosigner's consent. Great post, Gerri.

[Bobby Beaulieu]

You know I just went through this with my son 4 months ago, He wanted a car but after going down there setting up the financing and which ended up at $302 per month w/14% interest with him on the title, also the insurance is $350 best deal with him on my insurance which I pay $80 per month because of a accident 2 years ago now with him on there the price goes to $350 so I told I could not do it if he got hurt at school or couldn't work I do not have enough income to pay it. but he doesn't understand this I just got back on my feet from cancer and filed a BK 5 years ago. So I do not want to start over again being in debt. so he hardly speaks to comes to see anymore maybe 2 times in the 4 months