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Co-Signing Your Way to Bankruptcy

by Bankruptcy Attorney · Posted in Consumer Credit Issues, Personal Finance

All debts are either sole or joint. This is true concerning mortgages, car notes, personal loans, or credit cards. It all comes down to how the account was established.

If you have good credit, the account is based on your promise to repay. No one else needs to co-sign the account because you are not considered a default risk. The creditor can only pursue you for the debt.

If you have bad credit, however, a lender may be nervous to give you an account. They might be concerned about your present income, or your checkered history of bill paying. In these cases, the creditor will not extend credit unless someone with a stronger credit rating co-signs for you.

So what does it mean to co-sign a friend’s debt obligation? This is where some get confused.

Co-signing is NOT a character reference.
Co-signing is NOT a vote of confidence that you think your friend has the ability to pay the debt.

Co-signing is you putting your money where your mouth is. It is you personally agreeing to pay the debt for your friend if he does not.

So what is an authorized user? It is someone who gets to make purchases, but never gets stuck with the bill. I have seen this relationship between spouses, or between a parent and child.

A father, for example, may request that his daughter be an authorized user on one of his accounts. The daughter then has the authority to use the card, but dad always has the responsibility to pay the bill.

Here is the bottom line. Never co-sign any obligation for anyone (including relatives), or allow someone with bad spending habits to be an authorized user, UNLESS you are extremely wealthy; because in many cases, you will be stuck with the debt in the end.

Mark Buckley is a Rhode Island bankruptcy lawyer and CERTIFIED FINANCIAL PLANNER professional. If you live in Rhode Island and are struggling with excessive debt, call (401) 467-6800 for a free phone consult.

Tagged as: authorized user, bad credit, co-sign, credit cards, creditor, mortgage, mortgages