Guaranteed, Co-Signed and Joint Loans
The following article by Robert Powell, CPA CA CIRP LIT was published in the July 2106 edition of the District News.
Signing a guarantee for someone’s loan, co-signing it or having a joint loan is common. Yet, people really don’t seem to understand the implications. There are consequences and many misconceptions.
I often hear, “I am only a co-signer so the lender can only come after me if the primary borrower doesn’t pay”. Or, “I am only a co-signer so the lender can only come after me for half the debt”. In reality, the co-signor is usually jointly and severally liable for 100% of the debt. This means that, if there is a default, the lender will pursue the primary debtor and the co-signer at the same time and will be happy to collect their entire debt out of whomever they can recover from first.
Guaranteeing a loan is not much different than co-signing for the loan. Sometimes, a guarantee may be limited to a fixed amount but more often than not, the entire debt is guaranteed and the lender can pursue the guarantor at the same time as they pursue the borrower. Often, there is no requirement for the lender to first exhaust all collection efforts against the borrower before pursuing the guarantor.
Similarly, for joint loans, each party to the loan is jointly and severally liable for 100% of the loan, not half because two people signed or one-third because three people signed.
If you are going to guarantee a loan, co-sign one or borrow jointly with another, you need to understand what you are signing and what your obligations are. Understand that, if the other party goes bankrupt or otherwise has no ability to pay the obligation, it will entirely fall on you. You need to think about the consequences of adding your signature before you do so, not down the road when the primary borrower can’t pay. Similarly, you should think about what you are asking someone else to do when you ask them to guarantee, co-sign or enter into a joint loan with you. Too often, people will sign just to avoid conflict or disappointment or because they think they have some family obligation to do so. It is common for a spouse/partner to have to go bankrupt because of joint/guaranteed/co-signed debts of a former spouse/partner. Also, parents can be negatively impacted by guaranteeing or co-signing loans for children.
If you can’t afford to pay the obligation if the other party defaults, you should not be signing the guarantee, co-signing or entering into a joint loan. Saying NO can be incredibly difficult but, if you are going to say YES, make sure that you are prepared to accept the obligation as your own and can afford to do so.
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