How Can I Get Out of a Co-sign? I Cosigned for My Son in Law and Now He and My Daughter Are Going Bankrupt

When you cosign a loan, you assume a significant risk. From the lender's perspective, you're a crucial backstop that makes the loan workable and greatly increases the odds that it will be paid off on time and in full. This guarantee lessens the financial risks of the loan to the primary borrower as well as to the lender. Unfortunately, it transfers much of that risk onto your personal ledger.

Most borrowers make their payments on time. In general, cosigners remain "in reserve" and may avoid being called to account for their loans. In some cases, borrowers may require some financial support from their cosigners to ensure that their payments remain timely. This arrangement is especially common when the two parties are related by blood or marriage.

Even when blood or marriage ties are absent, primary borrowers should remain in close contact with their cosigners and promptly inform them of any pertinent changes to their financial well-being. Events that demand such notification include job losses, wage reductions, the arrival of new children, and unexpected medical bills.

If you're being called upon to cover the remaining balance on a cosigned loan, your legal recourse may be limited. In most circumstances, you have little choice but to continue making payments on the loan. If the loan's primary borrower is a family member, you may be able to work out an informal payment plan. This might require you to make on-time monthly payments on the loan then collect reimbursement from the primary borrower as financial conditions permit. In effect, you'd be serving as the lender of last resort for your relative. While it might take years to fully recoup your investment, this is the only option that won't negatively impact your credit score.

There are two additional factors that may impact your decision. First, the loan may carry a built-in "acceleration clause" that requires the cosigner to pay the remaining balance of the loan as a lump sum before the debt is discharged in bankruptcy. If this is the case, you may need to recover the necessary funds from your relative on an accelerated timetable.

On the bright side, you may be able to convince the borrower to reaffirm the loan during the bankruptcy process. If they do, they'll re-assume responsibility for the loan once their other debts have been discharged and take a heavy load of debt off of your shoulders.

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