You Co-Signed and They Defaulted, What’s the Next Step? - Westgate Law

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You Co-Signed and They Defaulted, What’s the Next Step?

filing bankruptcy, westgate law, southern california bankruptcy attorneys, file for bankruptcy, bankruptcy, southern california bankruptcy lawyers, cosign a loan, cosigner, liability from the cosigner, forbearanceIf anyone ever calls you and asks you to cosign a loan for them, regardless of who they are, your answer should be no. Don’t do it – unless you like the idea of financial trouble and pending bankruptcy proceedings. If you’re going to ignore this sage wisdom and become the cosigner on a loan for a friend or family member anyway, make sure you are aware of the potential consequences in case all does not go as planned.

In spite of the very wise, and very well known advice offered above, cosigned loans are actually fairly common. In some cases, parents are cosigning for children. Then there are the girlfriends, boyfriends, fiancés, roommates, coworkers, employers, etc. who cosign against their best interests. Setting aside the reason you decided to cosign in the first place and the reason that the loan eventually defaulted (against all assurances to the contrary), what happens next is going to be the same across the board.

When the “loved one” that you helped by cosigning can’t make the payments, you are suddenly stuck with them. If you can’t cover the payments due, you see the sudden, depressing crash and burn of your once stellar credit score. In some cases, the situation is even trickier as the friend or family member who needed the loan in the first place simply decides they aren’t going to pay. Is the cosigner actually stuck paying off the loan? Is there a loophole that can remove the liability from the cosigner who regrets their previous decision and no longer wants to place themselves and their credit at the mercy of another?

The first option is to stall with an attempt to negotiate a forbearance with the lender. This will be useful in situations where neither you nor the original loan holder is able to make payments temporarily. The lender may be willing to put a forbearance on the account that provides a temporary reprieve (most often a couple months) in order to allow time to come to terms with abrupt changes in income, debt, etc.

The second option is to take out a second loan to pay off the original loan that was cosigned. A good place to start would be debt consolidation companies or a hard-money private lender that is willing to take a risk by financing the payoff of the original loan and providing financing for the remaining principle debt. The new loan would be the sole responsibility of the original loan holder without a cosigner. The chances of accomplishing this are slim, but it’s worth looking into because it provides a cut and dry solution.

A third option is to refinance. This is another long shot, but if the signer is working with a bank or lender with which they have a positive history, it might be possible to renegotiate terms while cutting out the cosigner. The problem with this option is that most banks will only be willing to renegotiate terms if the borrower making the request has excellent (or at least good) credit. This probably isn’t the case if there have been recently missed payments.

Too often the kind deed of cosigning a loan for a loved one turns out badly. If you find yourself in this situation or in other sticky financial situations that are leaving you feeling like there is nowhere else to turn, please get in touch with one of the experienced southern California bankruptcy attorneys at Westgate Law.

About the Author

Justin Harelik

Justin has a singular goal: to get people out of financial distress and move them to financial stability and prosperity. He does this by combining 15 years of in-depth experience in bankruptcy, credit management, debt negotiation and student loan modifications, and he does it with both English and Spanish-speaking clients.

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