Q Dear Rick:
About five years ago I co-signed and loaned money to my then daughter-in-law.
At the time it was our understanding that she would make all the payments on the loan that I co-signed and with the money that I loaned her she was going to repay me in 10 years. This year my son and daughter-in-law were divorced. As a result, she shut her business down and went back to Spain where she is from. The problem is she has stopped making payments to the bank. The bank has notified me that I am responsible for the payments. My belief is that since my son and daughter-in-law were divorced and the divorce settlement says that she must continue to make payments on the loan, that I should not be held liable. I did talk to a family friend who is an attorney and he told me that I’m responsible. My question to you is, is he right and is there anything that I can do?
A Dear Hal:
I hate to be the bearer of bad news, but I do agree with the attorney that you are responsible to repay the loan. The fact that in the divorce settlement your ex- daughter-in-law agreed to continue to make the payments has no bearing on the bank. The bank was not a party to the divorce and thus, they are not bound by the settlement. The bank is the only party that can remove you as a co-signer from the loan. Therefore, the divorce, or even if your daughter-in-law had gone into bankruptcy, would have no effect on your responsibility as a co-signer on the loan.
My advice to you is to see if you can negotiate something with the bank. In many situations banks are willing to negotiate to reduce the outstanding balance of the loan. Therefore, it may pay to have your attorney friend, if he feels qualified, contact the bank to see if they are willing to enter into a negotiation. As far as I’m concerned, you have nothing to lose by attempting to deal with the bank. It may surprise you that banks frequently will negotiate in situations such as yours.
Co-signing loans for family and friends is always tricky. Not only can there be financial implications if something goes wrong, it can also have significant ramifications within the family which may be more difficult to deal with than the financial issues. Therefore, my advice to anyone who wants to co-sign a loan for a family member or friend is to always proceed with caution. I also tell them that unless they can afford to repay the loan if there is a default, they need to think twice before co-signing. I recognize everyone wants to help family and friends; however, sometimes you have to say no. In addition, you also need to consider how family dynamics will be affected if there is a default and you are forced to repay the loan.
One last note and that is, if you are loaning money to a family member or friend, you should have everything put in writing. All too often, in too many situations, there is not a clear understanding that there are responsibilities on the borrower. It is important for the borrower to know that the loan has to be repaid in a timely manner. Putting everything in writing shows the seriousness of the transaction and that repayment is expected.
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