It's a scenario few parents would ever consider: After
co-signing student loans for their child, their child dies
unexpectedly and debt collectors turn to the parents for
That's what happened to 61-year-old Ella Edwards when her only
child, Jermaine, passed away unexpectedly at 24. Suddenly she was
responsible for more than $10,000 in private student loans. She
couldn't pay and the lender didn't budge -- she signed and so was
on the hook.
"They called nonstop," says Edwards. "I told them that my son
was dead and I was trying but didn't have the money. They didn't
care, they just called and called and I couldn't stop crying. Every
day. It brought his death back every day."
Desperate, she used the online petition site Change.org to ask
for help, titling her petition, "
Forgive my deceased son's student loan
." People were moved, none more than radio host
. When he heard her story, he stepped in and paid the debt off.
Such benefactors are rare, however. Today, Edwards hopes her
situation will serve as a cautionary tale about the perils of
Despite warnings from personal finance experts about the
liabilities involved when co-signing another's credit application,
people still do it. Parents do it for their children. Spouses,
friends, parents and siblings do it for each other. And while not
all co-signing agreements end badly, many do.
If you find yourself saying yes to a request for a
for whatever reason, it may behoove you to take preventive measures
to offset potential troubles, urge experts. Here are 10 ways to
protect yourself when co-signing.
1. Act like a bank.
Lenders have a strict protocol for lending, so use them as a guide,
suggests Harrine Freeman, CEO of H.E. Freeman Enterprises, a credit
restoration company in Washington, D.C. "Character assessment is
key," says Freeman. For example, you can ask to examine the other
person's credit report, and ask about his job situation and budget
to make sure he can easily afford the payments, says Freeman.
Knowing that the borrower is on solid financial footing can give
you a sense of security.
2. Review the agreement together.
Once you have the credit card application or loan contract, read it
over together. "You've got to know what you're getting into," says
Freeman. "Both must understand the terms, especially the date the
payment is expected, and what happens if you pay late." Such
clarity should help the person responsible for the account's
management understand what the requirements are for keeping the
account in good standing.
3. Be the primary account holder.
For added protection, consider being the primary, rather than the
secondary, owner of the account. "You are legally obligating
yourself to the creditor for the debt, so why not have a little
more control?" says Wayne Sanford, a credit consultant with New
Start Financial in Allen, Texas. The statements will go to you, and
you can collect the cash from the secondary borrower to pay the
bill with assurance.
4. Collateralize the deal.
What else would a lender expect, especially if the applicant is new
to credit or has had past money troubles? Collateral! Freeman says
you could ask for an extra set of keys to the car you've helped
someone buy, and agree that if payments are not made on time, you
have the right to take possession of the car to either sell it to
pay off the debt or to assume loan payments on it. Or, if you
co-signed on a credit card, ask to hold onto another item of value.
If she runs up a huge balance, you agree that you can sell it in
order to apply the proceeds to the debt.
5. Create your own contract.
"Create a simple promissory note that discusses what the
obligations, costs, etc., the borrower will have if they default on
payment," says Ebong Eka, CPA and personal finance expert from
Tysons Corner, Va. You can include all sorts of stipulations, such
as to insist his paycheck be deposited directly into a checking
account, and then for the lender to automatically draft the
payments from it. This way you can be sure the money is in and then
goes out on time. When both parties agree to the terms, all sign,
then have it all notarized.
6. Set up alerts.
Even if you're not the primary owner, you can still hold the reigns
in a hands-off manner, says Denise Winston, author of "Money Starts
Here! Your Practical Guide to Survive and Thrive in Any Economy."
Set up text, email or phone alerts with the lender for when the
payment is due and when it's been posted. "This helps you stay on
top of the account you co-signed for and informs you when and if
you need to step in and take action," says Winston.
7. Check in, respectfully.
Meet up with the joint owner and discuss the account's progress
every few months. This way you can find out if the other person is
making payments on time or not, allowing you to offset future
complications. However, avoid the urge to micromanage, says
Winston, as it can cause a rift. Constant phone calls and
nitpicking sends the wrong message.
8. Insure your assets.
Depending on the size of the debt, you may want to consider
purchasing life insurance on the primary account holder. Yes, it's
not something you like to think about -- especially if you
co-signed on a loan with a loved one -- but things happen. The
question to ask yourself when co-signing on a large sum is how
financially devastated would you be if the primary account holder
passed away and you were left to pay the balance on the loan?
According to Soren Christensen, CEO of Advanced Wealth Advisors in
Naples, Fla., purchasing life insurance could be a sensible
safeguard. "The co-signer would certainly have an insurable
interest since they would be on the hook for the debt if the other
person died," says Christensen.
9. Establish trust with a trust.
If the loan or credit line is especially large, you might also
consider setting up a trust to protect savings and property. "For
someone taking on any new possible debt liability, whether for
themselves directly or as a co-signer, they should review their
estate plan to make sure they have properly protected their assets
from any possible future creditor demand issue," says Christensen.
Meet with a financial planner to identify the right type of trust
for such a circumstance.
10. Establish an exit strategy.
A joint financial arrangement should be a launching pad for the
needy borrower. "Twelve months is a solid timeframe" to rebuild a
credit score enough to, say, refinance an existing loan or apply
for a new credit card without your signature, says Sanford. Then,
ask the existing issuer if they'll remove you as a joint owner from
any old accounts. If they can't, consider canceling it. Both of you
might experience a slight credit score reduction, but it may be
worth it to break free.
Co-signing is serious business, so only do so only after taking
the proper precautions. Unless an angel investor comes to your
rescue -- as Tom Joyner did for Ella Edwards -- getting mad at the
lender if you get stuck with credit damage and debt will be
useless. When you autograph that paperwork, the contract is
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