Sometimes when you go to take out a loan
- and this is especially true for a young person trying to get their very first loan - a co-signer is required. The co-signer’s job is to guarantee the loan will be paid if you default on it. Unfortunately, your defaulting on the loan could also negatively impact the co-signers credit, and it is especially troublesome if you should happen to enter into a debt management programme
such as an IVA
. Having a co-signer on your loan can bring up a bunch of unpleasant issues.
Because an IVA compresses people’s debt into one manageable payment,
a debt with a co-signer poses an interesting dilemma. The co-signers assets are opened up to the courts as a way of paying off your debt simply because they co-signed your loan. The co-signer is held ‘jointly and severally liable’ for the loan they signed for you, and that makes both you and the co-signer responsible for paying off the whole debt. The lender can legally go after your co-signer to get their money if you default on the loan or claim it as part of a debt management plan. This could cause hard feelings between you and your co-signer.
- However, if you are filing for an IVA, your insolvency practitioner (IP) might be able to protect your co-signer depending on the relationship of the co-signer to you. For example, say the co-signer on the loan is your mother and the courts threaten to go after her assets. The IP may suggest having your spouse file for the IVA instead of you, claiming the debt that you intended to include on the IVA without including the co-signed loan and protecting your mother’s asset from being seized through the IVA. You’ll still be able to pay on the loan, your IVA and all of your essential debts without impacting your mother’s credit.
The same thing could happen to you if you decide to be the co-signer for someone else and they have to enter into an IVA. It’s important to make sure that the person you are co-signing for is going to be able to pay off the loan. If co-signing a loan for someone makes you uncomfortable or you know that the person won’t be able to pay the loan off, don’t sign the papers. You are the one that ultimately will have to pay the price of the loan if the person you co-sign for defaults. You could easily be putting your family in danger of having your assets taken away. You do not want this to happen.
Of course there are people that you would easily co-sign a loan for to help them get started in the world of credit. It is just a good idea to make sure that your finances are in place and stable before signing papers for a loan for someone else. If you cannot afford to pay the loan when it goes into default status, don’t sign the papers. If you do, you are only putting yourself at risk and facing the same financial problems as the person you are trying to help out.