How to Get Out of a Bad Co-signing Situation

stressed out woman sitting in front of a laptop

The following is presented for informational purposes only and is not intended as legal advice.

Most co-signing arrangements come out of a place of at least partial kindness. Someone is looking for a loan or an apartment and their credit score is just too low to qualify. While it may be easy to say, “Too bad – work on improving your credit score,” that work takes time. And when it comes to things like housing or transportation (in the case of a car loan), there’s usually no time to spare.

So, despite all the warnings, you offer up your primo credit history and co-sign on the loan. Most co-signers are family members. It’s easy to see why a parent or sibling would want to help a loved one get what they need, even with the risks attached.

But then…you notice that your credit score has taken a dive. Looking further, you find that payments are being made late or not at all. They may be family, but their inability to follow through is costing you. You may even have collectors calling you (your name is on the loan, after all).

So how do get your name off a co-signed loan?

See if refinancing is an option

Co-signing for a loan or credit account makes you just as responsible for that account as your family member or friend. Your credit will be impacted if payments are missed and collectors have every right to come after you for what’s owed.

If things aren’t quite so dire yet, you can see if the co-signer is able to refinance what’s owed onto a new loan or account that’s only in their name. This gets you off the hook, although any damage you took before the original loan was paid off will still be on your credit report.

Unfortunately, this is…pretty unlikely. If the borrower couldn’t get a loan without help to begin with and now you’re trying to get out of the loan because things are going poorly, there’s very little chance they’ll be able to get approved on their own now. This is the ideal path out from under a bad co-signer situation, but it’ll be very difficult to pull off.

Repay the loan directly

The best option is the one you’re going to be the least excited about. If you’ve co-signed on a loan and the other co-signer isn’t holding up their end, the path of least harm to yourself is to assume full responsibility for the loan and start paying it directly.

Of course that’s not “fair” and probably not at all within the spirit of the initial agreement you made with the borrower. But here’s the thing: your agreement with the borrower doesn’t matter. Perhaps, if you put something in writing and took the steps to create a formal contract, you may be able to eventually seek compensation directly from the borrower. But in the meantime, you already have a contract with the lender. In co-signing the loan, you were essentially saying, “If they can’t pay, I will.”

So if you’re concerned about the potential damage to your credit and the chance of a creditor taking you to court for an unpaid loan (which is a very real possibility), then it’s in your best interest to start proactively paying the loan yourself.

You can work with the borrower (if they’re responsive) to create a repayment plan, but in the meantime, your priority should be to protect your own finances and get the loan in continued good standing.

Work with the lender

If assuming the payments for a co-signed loan is beyond your financial capacity, it may be worth your time to contact the lender to discuss any available options. There’s a good chance they may not be able to do anything for you, but you may be able to work out a revised payment plan that keeps the account in good standing. Again, a lender isn’t required to do this, but it’s still worth a phone call.

Some important things to keep in mind about co-signing

Because co-signing is often pitched as “helping out” a friend or loved one, it’s important to remember that lenders, creditors, and leasing agents really don’t care all that much about any agreements or “understandings” you may have with the borrower/applicant.

  • You can’t remove yourself from a loan contract just because the other borrower isn’t holding up their end. Your responsibility doesn’t end until the contract is fulfilled and the loan is repaid.
  • Ownership and liability are two separate things. If you co-signed on an auto loan for someone’s car, but aren’t on the title, you’re responsible for the loan that paid for the car, but have no claim to the car itself. You may think that if you paid for it, you must also own it, but that's not always necessarily true.

Unfortunately, the co-signing horror stories are very real. A bad co-signing situation can be extremely costly, terribly damaging to your credit, and almost impossible to escape.

If you’re considering co-signing to help a friend or family member, be cautious and keep this information in mind. There are situations where co-signing can be mutually beneficial and there’s nothing wrong with wanting to help a loved one, but it’s important to remember that if things go south, it may be long, hard road to recovery.

If you’re dealing with unexpected debts and don’t have the means to make it work, consider speaking with a debt counselor to discuss your options. Nonprofit counseling is free and available 24/7.

Tagged in Loans, Laws and legal questions, Money and relationships

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

  • Better Business Bureau A+ rating Better Business Bureau
    MMI is proud to have achieved an A+ rating from the Better Business Bureau (BBB), a nonprofit organization focused on promoting and improving marketplace trust. The BBB investigates charges of fraud against both consumers and businesses, sets standards for truthfulness in advertising, and evaluates the trustworthiness of businesses and charities, providing a score from A+ (highest) to F (lowest).
  • Trustpilot Trustpilot
    MMI is rated as “Excellent” (4.8/5) by reviewers on Trustpilot, a global, online consumer review platform dedicated to openness and transparency. Since 2007, Trustpilot has received over 116 million customer reviews for nearly 500,000 different websites and businesses. See what others are saying about the work we do.
  • Consumer Federation of America Consumer Federation of America
    MMI is a member of the Consumer Federation of America (CFA), an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • Department of Housing and Urban Development Department of Housing and Urban Development
    MMI is certified by the U.S. Department of Housing and Urban Development (HUD) to provide consumer housing counseling. The mission of HUD is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD provides support services directly and through approved, local agencies like MMI.
  • Council on Accreditation Council On Accreditation
    MMI is proudly accredited by the Council on Accreditation (COA), an international, independent, nonprofit, human service accrediting organization. COA’s thorough, peer-reviewed accreditation process is designed to ensure that organizations like MMI are providing the highest standard of service and support for clients and employees alike.
  • National Foundation for Credit Counseling National Foundation for Credit Counseling
    MMI is a longstanding member of the National Foundation for Credit Counseling® (NFCC®), the nation’s largest nonprofit financial counseling organization. Founded in 1951, the NFCC’s mission is to promote financially responsible behavior and help member organizations like MMI deliver the highest-quality financial education and counseling services.