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So your son or little sister has asked you to cosign for a car loan, because they have no credit history or a bad credit history. A little thought beforehand can save legal hassles down the road.

Regardless of whether you're being asked to cosign for a car loan, student loan or mortgage, you should give careful thought and consideration to the "what if" situations before agreeing to cosign a loan.

The cosigner of a loan agrees to be responsible for a loan's repayment if the borrower defaults on the payments. With most cosigned loans, the lender can request payment from the cosigner at any time, whether or not the debtor is actually in default on the loan. This is in contrast to a guaranteed loan, where a lender can go after the guarantor only after the debtor has actually defaulted.

A cosigner will in most cases also be responsible for any late charges, penalties and legal fees associated with a default. The lender can:

• Sue you and get a judgment against you
• Make you disclose your assets, and
• In extreme cases, force the sale of property you own to pay the debt

In addition, if the debtor defaults, the lender will probably notify the credit bureaus, which can hurt your credit history and credit score. Current lenders can use this damaging information to raise your interest rates on existing balances. Future creditors will take the amount of the debt into consideration when determining how much money they're willing to loan you.

For these reasons, it's important that you not cosign a loan unless you have the financial means to payoff the loan should the primary debtor default. If you can't afford to repay the loan with your own money, you shouldn't volunteer as a cosigner.

In addition, you should only cosign a loan if you believe that the other individual is reliable, responsible and able to make the loan payments. Although there may be hurt feelings if you refuse to cosign a loan, there will also be hurt feelings–and more–if the cosigner defaults on the loan, forcing you to pay or damaging your credit.

Damage Control on Default

If either you or the primary debtor fail to make loan payments, the lender will repossess the item or foreclose on the home, sell it at auction, and come after you for any balance left owing on the loan.

If the primary debtor can't afford to get the payments back up to date, it may make sense to cut your losses right away by selling the item and making up whatever difference there might be on the loan. In most cases, this will be a cheaper way to maintain your good credit rating than making long-term payments on the item.

If the debt is owed to a credit-card company, you can try negotiating to pay off a portion of what is owed. Most companies would rather accept a lower repayment amount immediately rather than wait a long period of time for an uncertain result. If you end up negotiating a smaller repayment lump sum, make sure you get a clean credit record as part of the deal.

It's also important to set things straight with the primary borrower who defaulted on the loan, even if it's a close family member or friend. Make sure they sign a promissory note for the amount you've paid on the loan, and set up a definite schedule for repayment.

Questions for Your Attorney

Before cosigning a loan with a friend or family member, consider hiring a lawyer to draw up a contract that spells out each person's obligations regarding repayment of the debt, and details the steps you'll take if one person fails to make the required payment. Although this contract won't provide any relief if the lender decides to pursue you for non-payment of the loan, it will help formalize your relationship with the person for whom you're cosigning the loan.

Among the questions to consider asking your lawyer:

• Have you previously drawn up a contract like this one?
• How much do you charge for your services?
• Will we be able to negotiate the terms of the loan with the lender?
• Are there other steps you'd suggest that we take to ensure that the loan is repaid?

Related Resources on Lawyers.com^sm

- Need a form? Access hundreds of Consumer & Business Legal Forms that cover a range of legal needs such as Notice of Contract Default
- Read Reclaiming Property from a Cosigned Loan or access more Contracts and Consumer Law articles and information
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