debt

Co-signing a loan can be calamitous

Justin Harelikq_v2.gifDear Bankruptcy Adviser,
My daughter recently divorced. She and her ex-husband had purchased a $178,000 house. On her divorce papers, she stated she would free him from all debt to the house, meaning she would take over the house payment and refinance the house. She is having a problem refinancing and wants me to co-sign the loan. I own my house but barely make it on income. I feel she could make the payment. But if she got laid off, it would fall on me, and there is no way I can make a $1,400 monthly payment. Is there any way she can get a loan without my signature? She called many mortgage companies, but they want a co-signer. Should I take the chance?
-- Mary

a_v2.gifDear Mary,
Your situation definitely qualifies for the "bad or awful" decision award. You must be suffering from the idea that your daughter cannot keep her home and that you cannot help her. I can only imagine that this is a horrible feeling.

You want to help your daughter keep her house and remove her ex-husband from the loan. I am not sure why she must remove him from the loan, other than to avoid any future contact with him, but she simply might not be able to refinance. I understand that she agreed to this as a condition of her divorce. But I doubt another condition of her divorce was that she would lose the house. She needs to explore her options regarding the divorce settlement.

As a result of your daughter's untenable position, you are considering taking on a financial responsibility that you cannot afford. I truly empathize with your difficult dilemma.

Personally and professionally, I never believe that co-signing is a good idea. The risks far outweigh the benefits. What benefit will you get by co-signing? Your daughter will keep a house that might be too difficult to afford. She might lose the house and the lender might have the right to come after you for the money that it lost.

Here are two questions you need to answer before you co-sign:

  • Can I afford to make the payments? 

The mortgage lender appears to believe that she is not financially capable of making the payments; that's why you're being asked to co-sign. You must look at co-signing from this position: Can I afford this loan? If you cannot afford it, then you are not in the position to help your daughter because you are ultimately responsible.

  • What is my liability if the loan payments are not made?

You need to know what assets you have and whether those assets would be at risk if your daughter fails to make the payments. The terms of the loan agreement might make you personally liable for the payments and the balance if the property went into foreclosure or was sold for less than the outstanding balance on the loan.

Oddly, even though you are not bankrupt, you could benefit from talking to a bankruptcy attorney. He or she should be able to explain the risks associated if you were to co-sign and not be able to pay on the loan.

The key to your case is to avoid the subjective, emotional response to your daughter's dilemma. Objectively view the situation, consult with either an attorney or financial counselor prior to undertaking this burden. You must be aware of the worst-case scenario prior to making this decision.

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