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Dr. Don Taylor, CFA, Bankrate.com advice columnistMom shouldn't have co-signed for her brother

Dear Dr. Don,
My mom co-signed a car loan for my uncle. My uncle has a very bad credit rating. One thing the bank didn't do is to check his credit rating. They just went ahead and did the loan. My uncle has stopped making payments on the car and he is in jail. We also found out he should never have had a banking account, business, car, driver license, etc. We found out he is still on parole.

My uncle is also a con artist. My mom is stuck in the middle of this mess and I think my uncle is dragging her with him. I'm afraid something is going to happen to her.

Can my mom sue a bank for not checking for his credit rating? My mom has been trying to call her lawyer and leaving messages. He hasn't called back. The bank also repossessed my uncle's car last week. Now, my mom is very worried.
-- Kat Co-sign

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Dear Kat,
Your mom might eventually need a lawyer but not to sue the bank. Tell her to stop bothering her lawyer until she starts thinking some things through, on her own.

When a person co-signs a loan, he or she takes on the responsibility to repay the loan. The bank lent the money based on your mother's credit, not your uncle's credit. She took a financial risk that your uncle would make the car payments. He didn't, and now that payment history and repossession are on her credit report.

Since the car has already been repossessed, that's where she should focus her thoughts. The law concerning repossession varies by state, and that's where she may need her lawyer. But typically she is responsible for the difference between the outstanding loan balance and what the car sells for at auction, plus the bank's auction expenses and repossession costs. If the auction price doesn't cover the deficiency, then the bank will continue to look to your mother, and your uncle, for payment.

The lender typically has to offer to sell the car back to the borrower prior to auctioning the vehicle at a price that will pay off the loan balance and the bank's expenses. Avoiding the auction expenses can save some money, but buying the car raises a whole other set of issues, like finding a new-car loan with bad credit, selling the car on her own, title, insurance and registration issues.

A phone call to the bank should be sufficient to see where things stand with the repossession and the money it needs to become whole on the transaction. If she needs legal help from that point she should call her lawyer.

While the repossession and payment history surrounding the vehicle will stay on her credit report for seven years, your mom will be able to rebuild her credit history over time and improve her credit score. She took a risk for her brother and lost. Blaming the bank isn't the answer.

While it won't help your mother's situation, readers considering co-signing a loan should read the Federal Trade Commission's Facts for Consumers guide "Cosigning a Loan." My favorite line in the guide is, "When you're asked to cosign, you're being asked to take a risk that a professional lender won't take." The FTC also has a guide on vehicle repossession.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "financing a home," "saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: March 15, 2006
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