It's a common situation: You take out joint credit or co-sign a loan, then wish you hadn't. What can be done? Usually, not much. But there may be hope.
Ever go out of your way to help someone by co-signing a loan or credit card, then live to regret it? That’s why we advise to avoid it all costs. But if you’ve already done it, is there a way to undo it? That’s the subject of this week’s question.
I had to co-sign my daughter’s college loans. She is current with her payments, always has been, and there is no problem.
I have recently retired and would like to know if there is a way to get my name off of these loans?
Thank you. — Andrea
Here’s your answer, Andrea!
Getting away from co-signed debt
If a lender requires a co-signer, it’s generally because the borrower’s credit isn’t good enough to support the loan. It might seem logical that if the borrower’s credit improves during the life of the loan, or the borrower has proven trustworthy, the lender should agree to release the co-signer and look only to the borrower for repayment.
Unfortunately, however, that’s not typically the way it works.
The lender has everything to lose and nothing to gain by releasing the co-signer from a loan. After all, even if Andrea’s daughter now makes tons of money on her own and has a perfect credit score, there’s no guarantee she’ll remain that way. What if she becomes sick and can’t work? What if she dies?
The more people responsible for a debt, the less the risk to the lender. And if there’s one thing a lender loves, it’s less risk.
Fact is, once a lender has two potential sources of repayment on the hook, there’s little chance they’ll let either off. This is one reason why co-signing is a bad idea. It’s often permanent.
There is one possibility
You’ll note that the last sentence above said co-signing is “often” permanent. That’s because there are some loans that allow a co-signer to get off the hook, providing the borrower meets certain prearranged requirements. And one of the most common places you’ll find it is with student loans.
Andrea should call and ask the lender if her daughter’s loan contains a release provision, or better yet, sift through the loan documents herself. She should look for the words “co-signer release,” or “release provision.” If she finds them, she should see what the requirements are and if they’ve been met. For example, some lenders will release a co-signer when a required number of on-time payments have been made or the borrower builds a sufficient credit history and score.
If requirements have been met, she should contact the lender and get the ball rolling. Here’s a sample letter and more information from the Consumer Financial Protection Bureau. Definitely check it out.
Even if the loan documents don’t offer a co-signer release, check with the lender anyway. There’s no law against calling them and asking. The odds may not be good, but low odds are better than zero, and that’s what the odds will be if you don’t try. Also note that some lenders may allow for releases without disclosing that in their paperwork. So it’s always worth a call.
Same story with joint account holders
Many of the same rules that apply to co-signers also apply to joint account holders.
Say you combine your finances with the love of your life. You apply for a couple of credit cards together, or maybe combine your credit histories to qualify for a nice, fat mortgage.
Fast-forward a few years: Now you can’t stand the sight of each other. You each take a credit card, and your former love stays in the house, agreeing to faithfully pay the mortgage. Maybe you even have a divorce decree or other written document stating in black and white that the mortgage is now the responsibility of the person occupying the house.
Think any of this lets either party off the hook? Think again.
The lender doesn’t care who’s using which credit card, or who’s living in the house. They don’t care about agreements they’re not a party to, written or otherwise, saying who’s going to pay what. If you applied for a credit card or mortgage jointly, they can sue either or both of you to recover any losses. And absent a written agreement with them, that’s exactly what they’ll do.
Fair? If you’re the borrower, maybe you think not. But if you’re the lender, it’s perfectly fair. After all, when the cards and mortgage were applied for, both parties agreed to be responsible for the entire debt. It’s not your fault the co-borrowers now hate each other.
What can co-signers or joint account holders do?
In a word, refinance.
When you get divorced, the spouse keeping the house should pay off the existing joint mortgage by taking out a new one in his or her name alone. If that person doesn’t have the borrowing capacity, the only choice is to sell the house, pay off the loan and split the proceeds.
The same with credit cards: If you have plastic in joint names, the accounts should be closed and new, separate credit card accounts opened based on the credit of each individual.
It’s also true with co-signed loans. If Andrea’s daughter’s loans don’t allow for the release of the co-signer, the only way to eliminate Andrea’s liability is for her daughter to either pay off the loans or take out new loans in her own name to replace them. This can often be accomplished with a consolidation loan.
If Andrea’s daughter can’t refinance the debt with a consolidation or other loan, and there are no provisions to release the co-signer, then her mom will simply have to remain as a co-signer. And like all co-signers, Andrea needs to protect her good credit by setting up a system to make sure her daughter is making timely payments.
Do you have experience with co-signed loans? Share with us in comments below or on our Facebook page.
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I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. If you’ve got some time to kill, you can learn more about me here.