Monday, November 23, 2009

Escaping co-signing: How to get out of a co-signed loan, credit card

Experts say don't, you did anyway. Can you escape that co-signed loan?

By Dana Dratch

Consumer advocates and financial advisers are unanimous on the subject of co-signing: Don't do it.

Escaping co-signing: How to get out of a co-signed load, credit card

When you co-sign, you're not vouching for the person's good name or character. You're not promising to tell the creditor where to find the cardholder if those payments stop coming. You're agreeing to foot the bill. All of it. Along with fees and interest.

"That is the main role," says Nessa Feddis, vice president and senior counsel for the American Bankers Association. "They are not a co-applicant or joint borrower."

"Just put the pen down and walk away," says Catherine Williams, vice president of financial literacy for Money Management International, a Houston-based nonprofit credit counseling program.

"Please, don't co-sign for anybody," says Bruce McClary, spokesman for ClearPoint Credit Counseling Solutions, a nonprofit service based in Richmond, Va. "Because it's a gamble. I may be jaded, but I haven't seen any really great outcomes."

But if you did co-sign ....
Yet, you went ahead and did it.

Maybe only now do you realize that any black marks associated with the account can go on your credit report, too. And, since you've stepped up to accept full responsibility for the debt, you could have (depending on how the issuer reports the debt), that much less credit available to you when you need it for a house, car or credit card of your own.


Take the case of one bride-to-be. Her intended picked out a ring from a local shop, presented it to her and popped the question: Will you co-sign for this?

She said "yes."

When they broke up, she kept the rock -- and the financial weight of a loan with a 20 percent interest rate. He stopped making payments; she ended up forking over more than $2,400 for a ring worth less than half that, says Catherine Williams of Money Management International.

"I've seen hundreds of cases where people's credit is destroyed," says David Jones, who heads up the Association of Independent Consumer Credit Counseling Agencies, a national network of nonprofit credit counseling services based in Fairfax, Va. Co-signers "have all of the responsibilities with none of the benefits."

Of the 10 largest credit card issuers, eight -- Chase, Citi, American Express, Capital One, Discover, Wells Fargo, HSBC and USAA Savings -- say they don't currently allow co-signers.

"It's a long-term commitment," says Todd Mark, vice president of education for the Consumer Credit Counseling Service of Greater Dallas. Too often, he says, co-signer responsibilities outlive the relationships that prompted the arrangements in the first place.

Co-signing exit strategy
So now that you've wised up and want to get out of co-signing, what do you do?

It's not nearly as easy to exit a co-signing deal as it was to enter one.

Exiting the role of co-signer can be tricky. If the cardholder still doesn't have the credit to qualify for an account without you, the company may refuse to remove you as a co-signer unless the balance is paid. That leaves you two options:

  • Finding a replacement co-signer (if the company allows the practice).
  • Closing the account yourself. You may have to specifically request an account be closed; if you ask to be "taken off" the loan, they may refuse. Again, the loan must be paid off, or small enough so that the other party can qualify for a loan in that amount.

When a couple hit a financial and marital rough spot, they got credit counseling. The biggest financial hurdles were his bills on two cards that she had co-signed. The combined total: roughly $9,000.

By the time the couple split up 18 months later, they had paid down nearly half the balances. Then the husband left town and stopped making payments. The issuers came after the wife for almost $4,000.

"There was no way she could manage on her income," Bruce McClary, spokesman for ClearPoint Credit Counseling Solutions.

The woman declared bankruptcy.

Policies on ending co-signing agreements vary with the issuer, and the best time to ask how it works is before you sign. That way, if the potential cardholder or the issuer can't or won't answer all your questions, or if it seems too difficult to exit the arrangement, you can decline the arrangement.

And even after you manage to quit as co-signer or close the account, "you are still liable for any transactions made up to that point," says Feddis.

In some situations, if the cardholder converts the card to a solo account (without a co-signer) or gets a replacement co-signer, the issuer might not hold you responsible for earlier charges. Ask the issuer how that works in advance.

Another problem for co-signers: keeping an eye on the account balance and payment history may be difficult. Before you sign, find out from the issuer whether you can request and receive statements on the account. Typically, an issuer will require your permission to raise the credit limit on the card, but ask about that, too.

And if you're ever tempted again, , and remember what the experts say.

Co-signing situations, which mix a volatile combination of close personal relationships and money, are a prescription for problems, says Williams. "In 28 years of counseling, I've only seen one of those situations work out," she says.