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Co-signers often don't grasp the risks

PAUL WENSKE

May. 15, 2005 - Agreeing to co-sign for your Aunt Hattie or Bill down the street on a contract is a generous thing to do.

But don't let your generosity blind you to consequences that are hazardous to your own financial health.

If they default, you may have to pay the entire debt — along with late fees and collection costs.

You can also end up with a ding on your own credit report, perhaps jeopardizing your chances to get a good loan on a new house.

Here's what happened to a reader who co-signed a contract so his adult daughter could buy a cell phone. To make a long story short, she failed to pay off the contract but didn't tell her father.

The cell phone company turned the debt over to collection. The next thing the father knew, collectors were calling him, and the default appeared on his own credit report.

The father is angry because he was never notified by the cell phone company or the collection agency that the contract was in arrears.

“My wife and I are trying to buy a new home, and this does not help our credit scores,” he said.

“The collection company refuses to talk with us about removing this from my credit reports even though the collection was paid immediately after I found out about the ding on my credit reports.”

I talked to several experts about the father's problem. And the reality is that many people don't realize that when they co-sign, they are generally guaranteeing the debt.

If the primary borrower doesn't pay it, the creditor can in most states immediately collect it from you. And it can use the same methods it can use against the borrower — including garnisheeing your wages. If the debt is in default, that can show up on your credit record.

“It's a serious undertaking, and it can impact your credit history,” said Carol Reynolds, a senior attorney for the Federal Trade Commission.

Some states require a business or collection agency to notify the co-signer before reporting bad information to a credit bureau.

But in most other states, if the borrower gets nailed, the co-signer can get nailed too.

Judy Popper, a consumer affairs professor at the University of Missouri-Kansas City, said it is crucial for co-signers to carefully read the contract. Businesses often include waivers that allow them to notify only the borrower.

She advises co-signers to ask businesses to agree in contracts to notify them at the first sign of a default. Even if the debt is paid off, evidence of the prior default can stay on your credit report, as long it was properly reported to the credit bureau. The collection agency, however, is obligated to also report that the debt is no longer in arrears.

So it's important to get an unpaid debt taken care of quickly and to make sure the collection agency reports that fact to the credit bureau. .

The best defense is to understand the ramifications of co-signing. Federal law now requires businesses to explain to consumers their obligations when they co-sign a contract.

Here are some other tips to avoid getting hammered for your generosity:

• Be sure you are prepared to pay the loan if the primary borrower defaults.

• Consider how the debt might affect your own creditworthiness.

• Stay in close contact with the borrower about the status of the contract or loan.

• Keep copies of all important papers, including the loan contract.

To reach Paul Wenske, call

(816) 234-4488 or send e-mail to pwenske@kcstar.com.