What Happens to a Cosigner If I Don’t Pay?

A cosigner is an individual who agrees to take on legal responsibility for another person’s debt. This arrangement typically arises when the primary borrower has limited credit history, a lower credit score, or insufficient income to qualify for the loan. By adding a cosigner, the lender gains additional assurance of repayment. The cosigner undertakes a substantial financial commitment by backing the agreement.

Cosigner’s Legal Obligation

When an individual cosigns a loan, they become “jointly and severally liable” for the debt. This means the cosigner is equally responsible for the entire repayment of the loan as the primary borrower. The lender can pursue either party for the full amount owed, including any late fees or collection costs.

The lender is not required to attempt collection from the primary borrower before seeking payment from the cosigner. If a payment is missed, the lender can immediately contact the cosigner to demand payment. The specific terms are detailed within the loan agreement, which both the primary borrower and the cosigner must sign. Understanding the precise language of this contract is important, as it outlines the cosigner’s financial commitment and the lender’s rights in the event of non-payment.

Impact on the Cosigner’s Credit

A cosigned loan appears on the credit reports of both the primary borrower and the cosigner. The loan’s payment history, whether positive or negative, will affect both parties’ credit profiles. If the primary borrower makes consistent, on-time payments, this can positively contribute to the cosigner’s credit history and score.

If payments are missed or made late, these delinquencies are reported to credit bureaus for both parties. This can significantly reduce a credit score. If the loan defaults, is charged off, or sent to collections, these severe negative marks will appear on the cosigner’s credit report and can remain for up to seven years. Such negative reporting can hinder the cosigner’s ability to secure future loans, credit cards, or affect other financial aspects.

Collection Actions Against the Cosigner

When a primary borrower defaults on a cosigned loan, the lender will initiate efforts to recover the debt, which can directly target the cosigner. This typically involves contact attempts and formal demand letters to both parties, notifying the cosigner of missed payments and their obligation.

If initial attempts are unsuccessful, the lender may sell the debt to a third-party collection agency. The collection agency will then pursue the cosigner, employing various communication methods to secure payment. These agencies are legally empowered to collect the full amount owed, including any accrued interest and penalties. The cosigner must recognize that these collection efforts are a direct consequence of their legal responsibility for the debt.

Potential for Lawsuits and Judgments

If collection efforts do not result in repayment, the lender or debt collector may file a lawsuit against the cosigner. If the court rules in favor of the lender, a judgment will be entered against the cosigner. A judgment is a formal court order declaring that the cosigner legally owes the debt, and it becomes a matter of public record.

A judgment provides the creditor with tools to collect the debt. These actions can include wage garnishment, where a portion of the cosigner’s earnings is withheld and sent to the creditor. Creditors may also pursue bank account levies, allowing them to freeze and seize funds from the cosigner’s bank accounts. A judgment can also lead to a property lien, which attaches a legal claim to the cosigner’s real estate, affecting their ability to sell or refinance until the debt is satisfied.