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Before co-signing on the dotted line ... protect credit

Thinking about co-signing a loan for a friend or family member?

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You might want to do some serious thinking before you take that step. Don't underestimate the possible costs of scribbling your signature on a legal document for the credit impaired.

Co-signing has been known to destroy relationships and wreak financial havoc. In fact, most financial experts, such as credit counselors and financial planners, will tell you that co-signing is a bad idea. 

But, if you insist, here are some tips that can help you wisely safeguard your credit if you choose to co-sign for a loan.

Proceed with caution
Co-signing means you are telling the lender that you are equally responsible for the loan, and if the borrower fails to pay, YOU are guaranteeing that payment. Think about that. You're not just helping someone get a loan, you're promising to pay the debt yourself if the borrower does not.

If the lender decides to sue and wins, it can go after your wages and your property.

That's important. Studies have shown that as many as three out of four co-signers ultimately end up making payments on the loan.

Credit counseling organizations are seeing the effects.

"Twenty percent of consumers that have gone into the Association of Independent Consumer Credit Counseling Agencies' debt management plans have had issues with co-signing," says David Jones, president of AICCCA.

Bankruptcy attorneys are seeing a fair amount of cases, too. Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, says that cases are frequently seen with parents who co-sign on a car loan for a child with bad credit.

Marc Stern, a consumer bankruptcy attorney in Seattle, says 20 percent to 30 percent of his cases involve consumers who have co-signed for a loan.

"They were in bad shape anyway, but this put them over," he says. "The vast majority are girlfriends signing for a truck or stereo, mothers signing for their son's car.  It's mostly women who are co-signing."

Carla Jackson of Virginia Beach, Va., recently was discharged from a bankruptcy mostly caused by a car loan she co-signed for her husband.

"My ex-husband had his vehicle repossessed due to missing three payments, and because I co-signed while we were married, they came after me. Therefore I had to file bankruptcy because I couldn't afford to make the payments," Jackson says.

She says she was divorced for three years at the time the car was repossessed and hadn't a clue that her ex-husband had quit his job and stopped making payments. Jackson says she had excellent credit when she moved out on her own.  But when she went over her debts with an attorney, she realized that she could not afford to pay $500 for his vehicle and her mortgage, car payment, credit cards and utilities.

Next: "Three rules you should follow when co-signing"
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