“Moving in together” is usually used in the context of a further step in
the development of a romantic relationship. However, this article goes a
little bit beyond that. The question becomes, what can happen if I
co-sign or otherwise guarantee someone else’s debts of any kind?
Cohabiting need not, in and of itself, affect your credit or your
financial liabilities. If someone is
renting a house and you move in with them, but you’re not on the rental
agreement, you should be fine even if they default on their rent payment
obligation. (Other than having to find a new place to live, of course.)
However, once you co-sign on the rental agreement or the utility
agreements, things quickly become complicated and potentially hazardous
to your financial health. It doesn’t matter if you are romantically
involved or simply trying to share the costs of living with a roommate
(Except, or course, that if things go sour it’s usually more painful
when romance is involved.)
What happens if I co-sign for someone?
If you co-sign for someone on a loan, a rental agreement, a sales
agreement, or any other legal liability you normally become “jointly and
severally” liable for their obligations.
Joint and several liability
means that the creditor can collect the entire amount owed from any
party who is a signer, a co-signer, or a guarantor on the contract. He
could collect half from you and half from your friend, but he doesn’t
have to – he can get it all from you. This situation comes up a lot in
divorces. The divorce court assigns certain liabilities to the husband
and others to the wife. That determination is binding on the husband and
wife, but not on the creditors. If the couple both signed on the
obligation, and the one assigned the debt in the divorce disappears or
files bankruptcy, the remaining party can be required to pay the whole thing,
regardless of what the divorce decree says.
In the same way, anyone who co-signs could become responsible for the
entire amount, regardless of your agreement with the person who signed
the contract with you. You have to be prepared to pay the entire amount
if you co-sign for someone. The exact details depend on your
state
law. Check with your state’s Attorney General Office to find the
regulations in your state.
Video: Co-signing a loan - information and
implications
Why do creditors require co-signers?
The simple answer to this question is that the creditor doesn’t think he
can depend on your friend (wife, fiancée, partner, son, mother, sister,
etc.) to pay the amount owed. Normally this is based on their business
judgment (and that person’s credit score/report). The creditor probably
has a lot of experience, and statistically he’s probably right, so
you’ll probably have to satisfy the obligation if you co-sign. On these
issues you need to use your head rather than your heart.
Video: Suze Orman - Co-signing a loan is a mistake!
If I can afford to pay, is it safe to co-sign?
Even if you can afford to pay the other person’s debt, that’s not the
limit of your risk. Guarantors (that’s the technical term for someone
who co-signs on another person’s debt) almost always sign an agreement
that waives a whole bunch of legal rights. You usually don’t get notice
when a payment is late (but that late payment goes on your credit
report) or collection action is started (but that goes on there too).
The creditor doesn’t have to sue the original signer first – he can go
directly after you (and he will, if you have assets and your friend
doesn’t). Of course, you can always sue your friend (good for
relationships) and try to collect from them.
Cohabiting need not, in and of itself, affect your credit or your
financial liabilities. If someone is