Tag Archives: financial obligations

The Co-Signer Effect

  By petillo | July 22, 2010 - 6:42 am | financial planning, personal finance, Repercussions: A Retirement Review, women and finances, women and retirement
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This sort of an economy puts all kinds of financial pressure on families and friends. Some family members move back into the house while other simply are unable to fly from the nest.  Interruptions in unemployment payments for long-term out-of-work family members have put a strain on 10% of the workforce.  All of these things put pressure on your retirement plans in ways we had never thought possible.

But sometimes, it is not the chronically unemployed or underemployed that can damage the decades of hard work that you have put into your financial well-being. It is more often the person we trust who may not have taken the same care to build a credit history.  It can be as simple as signing a piece of paper – for someone’s loan.  Here are five simple solutions to the problem of co-signing any financial agreement.

Know the person.

You need to be a financial force in someone’s life in order to be able to make someone understand the gravity of the situation. In many instances, the most empathetic person this potential lender can find is the one they will seek first.  In many instances, this is mom or dad.  Although there are no specific data available to address the topic of whether women are more apt to co-sign for loans, they are more susceptible to what Enrichetta Ravina suggests is a financial decision based on limited information and more on the personal characteristics of the person seeking your signature, the argument they make for the process and how they present themselves.

This is called statistical discrimination.  While women are more likely to be empathetic, they are also more likely to base their decision on what they know about you.  In other words, the better the history, the greater the chances they will assume the future will be similar.

Know the Reason

In almost every loan type situation the borrower is scrutinized inside and out.  Each loan is an agreement between the lender and borrower to make good the balance over a specific period of time.  Credit scores are evaluated, past history is brought into account and the lender often allows their bias to take center stage in the process.  While Ms. Ravina’s paper (Love & Loans: The Effect of Beauty and Personal Characteristics in Credit Markets) is about how these loans are made, the focus of the study was to find out if better deals were had by prettier people than others.

Most of us fail at accurately putting these potential borrowers (our co-signers) through a rigorous evaluation and in many instances, do not set stringent enough parameters for the borrower.  When you co-sign a loan, you are the borrower as well.  While you may have taken great care in building your credit history, the person you are signing the agreement with may have little or no history to bring to the table, is relying on your credit history to sway the lender and if we stop to think about it, would not be in this position had you not done all of the work on your credit.

So why do we let decades of hard work on our own personal finance take a backseat to someone who has done nothing?  It’s hard to say for sure but what we do know, is there are some things you can do.

Know the Terms

Your credit history will lower the interest rate on the loan but it will still be higher than if you had borrowed the money yourself.  So ask yourself, would you borrow the money yourself and hand it over in a lump sum to the person you are co-signing the loan and do you have second thoughts about ever getting repaid?  The credit limit on a co-signed credit card is often the same thing.  If there is a $3,000 limit on the card, would you give $3,000 to the person you are co-signing the loan with, confident that you will get it back?

Each loan you sign for makes you a partner with someone who would not be able to secure the debt otherwise.  This puts your financial well-being at risk.  It also entitles you to a billing statement. According to Lawyer.com, your signature on the loan gives the lender the right to “sue you and get a judgment against you, make you disclose your assets, and in extreme cases, force the sale of property you own to pay the debt”.

You should inform the co-signer that you will take immediate action should there ever be a late payment. Sounds harsh but your credit score is at risk which could translate into higher insurance premiums, possible hiring problems and of course, higher loan costs for you in the future.

Know how to control the damage

Damage control is important. Contact the lender and tell them what you intend on doing should the co-signer miss a payment or default. If there is an item (such as a car), sell it and take the loss.  You will need to cover the difference but in acting quickly, as soon as there is a problem, you may not do any damage to your credit score. A lump sum payoff is always best when trying to satisfy a debt such as this.

Like any financial plan, plan for the worst.  Draw up a legal contract with the person using an attorney.  This might seem harsh and it will do nothing in terms of satisfying the lender’s requirements but it does offer the co-signer a way to understand how you will react and why.  In some instances, a lawyer may be able to contact the lender for you. Keep in mind that this can be costly and since you are the only one with the money, it might be best to do the heavy lifting yourself.

Know that You have No Rights

Upon co-signing, you will only have obligations. The Federal Trade Commission has published a booklet to help you make the decision of whether to or not.  But the best way to think about this situation is: “If a professional lender wouldn’t loan the money, why should you take on the responsibility?”  In other words, if you don’t have the money on hand to give to the co-signer, you shouldn’t lend it via co-signing.  Is it a harsh lesson for the person with no or bad credit history? Absolutely.  Will there be personal blowback for your harsh stance on involving your finances with their less-than-stellar history? Yes.

Some lenders, Sallie Mae, the student lender for instance, will release your co-signer from the loan after the graduated student proves they are making payments.  With Sallie Mae, that can come after 12 to 24 on-time payments.  Check with every lender to find out if they will do the same.

The better your credit history, the more favorable the terms – although don’t expect what you would have received had you applied on your own.  Lenders will look at how long the you have lived at your current address, whether you have a stable job, and whether you have an established credit history.

It might simply be easier to subsidize.  A personal loan agreement (without lender involvement) might be the best way to help your borrower.  Your rights remain (a purchased car would essentially be purchased by you and resold to the borrower) but the obligations, the risk to your credit history and the surprise that this person you trusted should not have been are all eliminated.  The loan is yours; you might as well lend it yourself.  If you can’t, how can you expect to pay it back upon default?

The Power of Sale

  By petillo | February 8, 2010 - 11:53 pm | Profitable Investments
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Last Friday, on MomsMakingaMillion radio with Gina and Kat, the topic of deficiency judgments was discussed in the MoneyTips section of the show.  I know something about foreclosures and wondered if what was being discussed could be prevented and how.

In a previous article here, we looked at the possibility of walking away from your home. The obligation, we argued is one that involves two parties: lender and the borrower.  Every financial contract, we all know comes with obligations.  But exactly how those obligations are applied can vary from state to state.

Gina, who resides in Nevada, gave fair warning to the homeowners in her state about the pitfalls of owing money long after you have been foreclosed.  Called a deficiency judgment (the only states that have no right for the lender on the books are Massachusetts, Mississippi, West Virginia and Delaware), this action theoretically allows the lender to pursue you for the balance of the loan due after the house has been foreclosed, .  While on the surface, this seems like an additional blow to your already decimated financial world, but there are steps that must be taken and certain rules that protect you.

The lender cannot pursue a lien on any other home or property, or garnish wages during the process. This is usually the biggest concern to folks involved in the foreclosure process.  Before I discuss some of that process, it is important to note that your wages are not part of the loan agreement to buy the house. The house is the collateral and the bank is only obligated to get what collateral they have agreed to in return.  That doesn’t mean that they couldn’t go after you for the deficiency judgment though.

In order to go that route, the lender would have to take the homeowners back to court.  This is assuming you were obligated to go to court in the first place.  Some states have judicial foreclosure which requires you to have your fate decided by a judge.  In many states, the deficiency judgment can only come as a result of this process.

A non-judicial foreclosure is spelled out in your loan papers as a “power of sale” clause.  This describes how it works and how long the process takes.  Unfortunately, this is one of those important papers you gloss over when signing the reams of documents required at the title company.  Nevada has just such a law and it can be used to try and get you to pay for the balance of the loan.

Keep in mind that there are time tables that must be closely followed.  If the lenders does not, for whatever reason, adhere to those rules, the non-judicial judgment may be questioned.  In short, you will receive a certified letter explaining that you are in default and must, as they say in the loan business, cure the debt. But if you were able to do so, you probably wouldn’t be in this spot in the first place.

Before you get in that situation, attempt to work with the bank as much as possible.  In the current economy, the bank doesn’t want your house back.  They would just as soon see you in it.  You might be able to negotiate a forbearance, allowing you a couple of months to get your finances in line.

This has been a real sticking point for the Obama administration as banks have been reluctant to work with borrowers who are in trouble.  If you see no way out of your current situation and your finances do not look to be improving, file for Chapter 7 and rid yourself of your unsecured debt.  This will allow you to stay in the home and possibly realign your finances enough to keep paying the mortgage, underwater or not.

Once the process has begun and the timelines are being adhered to, there is little you can do. You signed the documents at closing and they are legally binding. Nevada also has the ability to accelerate the loan once you reach default, making payment in full the only option.  Once the house is sold (and there are rules surrounding this as well) the lender, at least in Gina’s state, has the right to come after you once three months has passed.

The question is: will they?  Not only will they need to hire local attorneys to file the lawsuit paperwork, they must also schedule a court appearance to get the judgment from the court.  That leaves the lender looking to the local jurisdiction to enforce the court order.  This is a long and costly process and may not be worth the effort of the bank to chase.  They may simply write down the loan and move on.

To understand the process the lender must go through, keep in mind that the lender borrows as well from the Federal Reserve.  The Federal Reserve requires lenders to put potential losses aside in a non-interest bearing account, tying up valuable, loan-able cash. This, and the perceived ability of the lender to get what they are looking to recover depend on whether you can even come up with the cash.

They will ask for a Net Worth Statement (be truthful) and determine whether the whole process is worth chasing at that point.  Dave Dinkel, author of “32 Ways to Quickly Stop Foreclosure” writes that some lenders “usually chooses not to get a deficiency judgment and instead report the loan deficiency amount on IRS Form 1099. The result to the homeowner is a “phantom income” requires him to pay income taxes on this amount.”  This can be a cost-efficient method for both parties. The same tax rules apply for capital gains that are taxed ($250,000 for single, $500,000 for couples) as they would for phantom income – which you never really received.

Mike Walsh at ForeclosureFish.com suggests that it doesn’t necessarily stop there. The bank will sell the judgment for pennies on the dollar at that point and the process begins again.  There are several things you can do if this happens.

Don’t hide or lie or otherwise play stupid.  They will, at each dodge, add their costs to their pursuit of you.  And these costs will be passed on to you.  Here’s how you might endure the process.

Assume that the collection agency bought the loan for pennies on the dollar.  Their attorneys have found you and made you aware that the balance is due in full.  Negotiate and be upfront about your ability to pay.  While they cannot usually garnish your wages (in some states) the rest of your money (bank accounts, etc.) are fair game and will be taken.  So talk to them.  Offer to pay about 10% of what is due and tell them that you can handle the payments at that level.

They may balk but in many instances, they will be swayed by your good faith effort.  Keep i mind that they will not go away.  You can’t run or hide.  Unlike banks and other lenders, they will not write you off the books.

So Gina was right about the process although it doesn’t happen the same way everywhere.  These are money obligations that cannot be dodged and should be carefully considered when you buy (co-signing also makes you liable) anything.

While you might be able to walk away, the shadow of that debt will stay with you even if you try to ignore it.  Instead, try to be as honest as possible with the lender, the courts and the collection agency.  In many instances, you will not be free of the obligation, but far-less than you might expect will paid out of pocket for a lesson you should have learned beforehand.

The upside to this process: the loan may have been securitized (bundled with countless others) and may be hard to untangle.  The downside: no home and damage credit.

Find out how your state treats foreclosure and your options prior to getting to that point.