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Recovering Property from a Cosigned Loan

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What Does It Mean to Cosign a Loan?

Cosigning a loan is an important decision that carries with it many potential benefits. A person may voluntarily cosign on a loan with the primary borrower, who is typically a friend or relative. Cosigning allows the primary borrower to obtain a loan that they might not otherwise be qualified for due to restrictions, such as bad credit or a non-existing credit history, and gives the lender with some assurance that the loan will be paid for.

What Are Some of the Consequences of Cosigning?

There may also be serious consequences to cosigning a loan, since, by cosigning the loan, the cosigner assumes liability in case the borrower is unable to make payments. In some instances, the cosigner may be held liable for the full amount of the loan, as well as late fees or costs associated with collection. If the cosigner is required to pay off the entire loan, this required repayment may negatively affect the credit history of the cosigner.

If the borrower is unable to make payments on the loan, the loan will go into default status with the lender. In such instances, the lender is legally entitled to obtain monetary payments from a cosigner. Thus, the lender may be able to sue the cosigner for the existing debt or have the cosigner's wages garnished in order to pay for the debt. For this reason it is important to discuss all the implications of cosigning with both the lender and the borrower whom you are cosigning with.

Can I Recover Property or Fees from a Loan That I Cosigned On? 

While it is best to be prepared for the worst case scenario before cosigning the loan, there are several steps you can take to recover losses incurred if the loan goes into default. Here are some options to consider in such a situation:

  • Ask whether the borrower can resume making payments
  • If the borrower is unable to continue making payments, determine whether your budget will allow you to assume payments or ownership properties
  • If you have assumed the entire payment amounts, consider whether the borrower will transfer their ownership interest to you in exchange
  • If you have obtained an ownership interest over the properties attached to the loan, check to see if you can have the loan refinanced to reflect your sole ownership and whether you may legally purchase the property
  • Inquire whether any properties tied to the loan may be sold in order to protect your credit rating
  • Consult with the primary borrower in order to determine whether they can repay you the money that you spent in getting the loan out of default status

Do I Need a Lawyer to Advise Me On Cosigning a Loan?

While cosigning on a loan is mostly a personal decision, it can have heavy consequences for the cosigner. Thus, you may wish to hire a lawyer before you cosign in order to obtain advice and counseling regarding your options. It is a good idea to enter into a written contract with the borrower in which you outline specific steps to take in the event that the borrower goes into default with the lender. An experienced lawyer can help you draft such a contract so that your interests will be protected beforehand.

Photo of page author Kristen Johnson

, LegalMatch Legal Writer

Last Modified: 06-05-2014 11:00 AM PDT

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