How to Remove Yourself from a Bad Credit Card or Loan Co-signing Situation

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Bad Credit Card

When you agree to co-sign for a credit card or loan, you help the other borrower unlock previously unattainable financial possibilities. However, this act of generosity comes with inherent risks.

The person you’re putting yourself on the line for is usually someone who has a bad credit history or doesn’t earn enough. When it comes to loaning money to such people, lenders have to be extra cautious.

This is where becoming a co-signer comes in.

Basically, as a co-signer, you’re agreeing to repay the borrower’s debt in case they default. If you can’t make their payments, it will reflect negatively on your credit score and might end up in a lawsuit.

If you’ve already co-signed a loan or credit card for someone but notice their credit score is plunging more and more, with late payments becoming a norm, you need to get out of it now.

What to Consider Before Co-Signing

Before you co-sign a loved one’s loan, there are a few things you have to consider. Know that the lender will not care about the relationship you have with the borrower or the agreements you’ve come to. They’ll want their money back.

Be sure that you can trust this person because it’s very difficult to get out of a co-signed contract later on until the debt is paid off. 

Also, keep in mind that though you agree to help someone out, it doesn’t mean you have any ownership in what they purchase from that money. 

Making a wrong co-signing decision can land you in hot waters that are nearly impossible to get out from. Be very cautious when you’re making this potentially life-altering decision. Know what you’re getting into because if things go wrong, it’ll not be an easy road to walk through.

What to Do to Get Out of a Bad Co-signing Situation

Try to Make the Borrower Refinance the Money

If the situation is not so bad yet, but you’re noticing more missed payments, you can ask the borrower to refinance the debt into a loan in their name. This will free you from the situation, but your credit report will still reflect the damage you’ve taken before this.

However, you may not be able to pull this off. Since your friend or family member couldn’t get a loan earlier without a co-signer, it’s unlikely they’ll be able to do it now.  

Go Ahead and Pay Off the Entire Loan Yourself

This is a more cautionary option than letting the borrower get you into more mess. You can own the responsibility here and pay off the loan. When you were becoming a co-signer, you knew the risks involved and went ahead with it anyway. 

If you have a formal contract with the individual, you may be able to ask for compensation down the line. In the meantime, minimize the risk and pay the money, especially if you don’t want to destroy your credit score. 

Move the Balance to a Balance Transfer Credit Card

The borrower can also choose to transfer the remaining debt to a balance transfer card. These credit cards come with no interest for the first 18 months, which can work in the borrower’s favor. However, this option is only valid for borrowers with good credit scores. 

Check if the Lender Has a Loan Release Option

At times, lenders do have a release option. This can be availed after the borrower has made on-time payments before and have increased their creditworthiness. See if the lender offers a release option; if they do, you can request it. 

Sell the Collateral to Pay Off the Loan

If the loan is secured by collateral, ask the borrower to consider selling it off to pay back the loan amount. In most situations, the collateral the borrower has given should be worth more than the amount taken, so paying off the entire amount should not be an issue.

However, you can’t pressure or force the borrower. Your only responsibility is to make the required payments if the borrower fails to do that.

If There’s Forgery Involved, Report It

If the borrower has forged your sign, you can get arrested. To prevent that from happening, let the lender know as soon as possible and report the forgery to the police. Your silence can get you into legal trouble.

About the Author

Francisco Jose Faraco is the founder and CEO of Faraco Partners, LLC, a New York-based firm. The CFA Charterholder is also a Teaching Assistant in the University of Chicago’s Financial Mathematics program. Previously, Francisco has worked for firms such as Morgan Stanley Faraco, Merrill Lynch, and Banco Santander.

 

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