Co-signing a loan? Consider the risks

McClatchy-Tribune Information Services

July 4, 2016

PITTSBURGH ó Time and time again, staff members at Advantage Credit Counseling in Pittsburgh have seen parents and grandparents suffer the consequences of financial ruin all because they co-signed a loan for a child or grandchild who either could not pay back the debt or simply refused to.

"If the primary borrower defaults on payments, it reflects negatively on the co-signer," said Heather Murray, manager of education at Advantage Credit Counseling. "If the primary borrower canít pay the loan, the co-signer is responsible for taking on the debt."

Friends and family members who co-sign loans to help someone they care about obtain college education or buy cars or other high-end consumer purchases may find out the hard way that taking responsibility for someone elseís debt not only risks damaging a relationship, but also their own financial health.

The chances of co-signers losing money or suffering a spoiled relationship are high, according to a recent report by, based in Austin, Texas.

The company found 38 percent of co-signers had to pay some or all of the bill because the primary borrower did not; 28 percent experienced a drop in their credit score because the other person paid late or not at all; and 26 percent said the experience created bad blood in their relationship with the person they co-signed for.

The survey, conducted by Princeton Survey Research Associates International on behalf of, reported about one in six U.S. adults have cosigned a loan or credit card for someone else. Auto loans accounted for 51 percent of all co-signing. Personal loans (24 percent), student loans (19 percent) and credit cards (16 percent).

Matthew Herron, managing attorney for The Debt Doctors at Quatrini Rafferty in Pittsburgh, said when it comes to co-signing, the cases he sees that most often lead to bankruptcy involve parents co-signing for student debt.

"When they sign, they think their children are responsible for the debt and they are helping them go to school," Herron said. "But years after they graduate if the child canít pay the debt or refuses to, then the parents are on the hook for a very large debt.

Herron said there is no remedy for eliminating student loan debt, but one strategy he uses is to put the child into a Chapter 13 bankruptcy to take the heat off parents in the collection process. The law has a provision that gives protection to co-signers if one of the borrowers on a loan files for Chapter 13 bankruptcy.

"Normally, creditors go after the co-signer because they have better credit and more assets," Herron said.

Lynnette Khalfani Cox, founder of based in Mountainside, N.J., said every study she has seen on the topic confirms that more often than not, giving family members or friends loans or co-signing for other peopleís debt is a bad idea.

"If someone has to come to you for a loan or in need of a co-signer, chances are the person already has, at best, thin or no credit, and at worst, bad credit," Cox said.

She considers it admirable that people ó out of love, sympathy or concern for someone elseís plight ó want to help out. But, she said, that doesnít make it a smart financial move.

She typically urges people not to do it.

"This isnít a hard and fast rule, of course," Cox said. "There are certain times when it may be just fine to help out someone by co-signing. But both people should understand the terms and should recognize the risk to their relationship if things donít go as anticipated. For some people, they may decide that itís just not worth it to risk a valued relationship."