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co-signer caught in the middle

Dr. Don,
My mother co-signed a car for me when I was 18 years old. The car was fairly expensive, around $13,000. After six months, I could no longer afford the payments.

My older sister had just declared bankruptcy and offered to buy my car and take over the payments. She did, except my name is still on the auto, and it still affects my credit. My mom refuses to let me sign off on the car, so it would be in her name only. I think we should sell it to get it out of my name. She refuses.

Can I do anything to force the sale or force her to let me sign off, or am I stuck for five more years with this on my record?
K.R. Ying

Dear K.R.,
From what you've written, your sister didn't really buy the car, she just took over the payments. So you're right in thinking that her payment history is going to continue to show up on both your mother's and your credit reports.

Your sister won't get credit for making timely payments, but she got a car fresh out of bankruptcy when it's unlikely that she would have qualified for a loan. Your mom probably doesn't see much difference in which sister's credit she's guaranteeing, since you couldn't afford the payments, and your sister went bankrupt. She's probably afraid that if you sell the car to your sister, then she'll face a higher loan payment because of your sister's credit rating.

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In reality, it's her credit that is carrying the day on either loan. She should be able to find a lender that would give her a rate close to the current interest rate on the loan. She should start with the current lender and talk to her credit union or bank.

Negative information stays on your credit report for seven years. Late payments on this auto loan could haunt you for a lot longer than five years. What if your sister makes a late payment four years from now? You need to convince your mother that it's in everyone's best interest to actually sell the car to your sister. There's no reason to drag down everyone's credit rating.

If both you and your mother are on the title, then you may need her signature to sell the car. If the title lists you or your mother as the registered owner, then only one of you need to sign off on the sale. If the title lists you and your mother, then both of you will have to sign the title to sell the vehicle.

Check with your state's DMV for the final say on what's required. Remember, if you're upside-down in the car, meaning that the loan balance is more than what the car is worth, then selling the car will require you to make the bank whole on the transaction.

The last piece of the puzzle is auto insurance. If the car is in your name but your sister is driving the car, then who is paying the auto insurance premiums, and who is actually insured to drive the car? This could be a much stickier issue than what might happen to your credit report. Talk to your agent (or her agent) and make sure that your sister is in fact insured to drive the car.

-- Posted: Oct. 18, 2001

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