I discourage co-signing for two reasons: it doesn’t help the one who is making the request and it invites trouble in the relationship. The reason someone needs a co-signer is because the potential lender has determined that this particular borrower is not a good risk. Therefore, the best way to help this borrower face the issues causing concern to the lender is to NOT co-sign. The reason I say co-signing will jeopardize the relationship is because of what happens when the borrower fails to make those payments: the co-signer’s credit will be dinged and he may end up making those payments himself. I can feel the tension now.
But what if the one who needs co-signing is a spouse? My guess is that you are thinking, “This is my husband/wife! Whatever we do, we do together. Co-signing will help us both.” You may be right, but I urge you to think twice. Read on:
A True Story
When Fred and Joyce (not real names) were first married, their future looked bright. Fred had a debt free Bachelors degree; Joyce likewise had a degree — from a prestigious university — along with the debt it took to get that degree. Fred had a stable job; Joyce wanted an advanced degree. Because she didn’t qualify for the student loan required for that degree, Fred co-signed for the loan.
Fast forward ahead fifteen years. The couple has been divorced ten years. Fred has remarried, has three children and no debt other than the house. They have slashed their budget sacrificially in order to allow mom to stay home with the kids. Things are tight, but they are making ends meet.
Letters and Phone Calls
Because Joyce has fallen behind on her student loan payments, the lender started squeezing Fred with letters and phone calls. Fred called his ex-wife (whom he has had very little contact with since their divorce) to ask what was going on. “Don’t worry,” she replied. “I will take care of it.” But she didn’t. The letters and phone calls continue. Now, when Fred tries to contact Joyce (text messages…phone calls…emails) she does not respond.
Frustration
Fred, with good reason, is very frustrated. The letters state that one option is to garnish his wages. This, as Fred well knows, is not an idle threat – federally backed student loans can be garnished without a law suit. Even though his divorce decree stated that Joyce would be responsible for all of her student loans, his signature on a loan document supersedes that ruling. Furthermore, his credit rating is being incrementally damaged with each missed payment.
What to do?
What can Fred do? Although he is rightly upset with his ex-spouse, he generously offered to pay for financial counseling in order to help her better manage her money. Again, no response. This is where the situation stands as I write this post. Fred, so far, has not communicated directly with the lender, but he will be doing so soon. One thing he will ask is whether Joyce’s wages would be garnished before his would be. This would seem to make sense. Another solution – a great one – would be for her to refinance the loan in her name only. However, assuming her own credit rating is shot, doing so is probably not an option. Other than taking over the payments himself (which could require his wife to re-enter the work force), there seem to be little Fred can do.
This debt will continue to plague Fred and his family until it is gone. Co-signing, for him, is turning into a nightmare.
If you are considering co-signing a loan for your spouse, I urge you to think twice. Don’t say, “It could never happen to me.” Fred and Joyce were saying that same thing 15 years ago.
Readers: Do you cosign loans? Have you done so for your spouse? Any suggestions for Fred?
The only loan I might consider co-signing with my spouse (and I would NEVER co-sign with anyone else) would be a home mortgage – at least that’s bankruptable.
Outside of that, I can’t imagine any reason to co-sign a loan for someone. It’s not a “good thing” it’s a horrible thing.
Thanks for this horror story, Joe. The worst thing is that this isn’t an isolated event. This kind of stuff happens every day with couples and families and friends all across North America.
I never would have thought of this. Another good piece of advice for my kids someday since you never know what can happen.
@Alex,
Yep…this is indeed a horror story, and with 50% divorce rate in America, I am sure you are right that the case I wrote about is not an isolated event.
@cashflow,
Fred and Joyce didn’t think of it either. I think we need to hear these stories because we DON’T think about them, but they happen all of the time. I am by nature an optimist, so I tend not to imagine worst case scenarios. But a touch of healthy cynicism might just prevent some big problems.
I guess if you believe divorce is an option this would be a route not to take. However, when I marry I will stay married. One funny saying goes like “divorce is never an option, but murder is.” Should we also sign a pre-nup in case the marriage falls through? It is setting yourself up for failure. I think this shows a sign of distrust of your spouse and could cause a bigger rift than merely signing.
Yikes, what an awful position to be in. Thanks for the tips and the warning! -Sydney
Sydney — Yes, it is awful. I don’t enjoy writing stuff like this, but if I can make others think twice, maybe I can help them prevent the same mess in their lives.
Jon — NO ONE goes into marriage thinking divorce is an option. But 50% of these people are wrong. “Fred” in my story thought, like you, that he would stay married. But “Joyce” filed for divorce. My point? Be careful about thinking, “That will never happen to me.” One person cannot unilaterally prevent a divorce. I hope you are right and when you marry, you will enjoy a long, rich and full marriage.
You make a good point that not signing could demonstrate distrust and thus create a rift. I also agree that pre-nups are setting a couple up for failure. However, when co-signing for a spouse is the issue, I would hope that the couple would realize that they have a credit problem and allow that problem to motivate them to work together to figure out other options that don’t involve debt … and co-signing. At any rate, my advice in the post is to think twice before co-signing for your spouse. I think that is good advice.
Things can get even more messy in a community property state. If one person gets an individual credit card while married and then is divorced the other may become responsible for 1/2 even though they never charged a dime. It is becoming clear that the marriage laws often benefit the lenders most as it gives two parties (and their future spouses) to collect from regardless of the ultimate outcome of the marriage.
One question I have considered is that if a couple is married then one dies and the other remarries and then dies all the work of the first spouse could go to the second who they have never even met.
I totally now believe in prenups. It compels a couple to talk about all these issues before marriage. If in doing so it ends up breaking them up than that is a good indication that trouble was down the road anyway since they already don’t agree on basic financial goals and objectives. The time to open ones eyes about their potential spouse should be before the marriage not a rude awakening after.
bili,
It is tough learning lessons the hard way, but those lessons will not be soon forgotten!
Carol,
I am not very familiar with community property states, but from what I have read, the property (not necessarily the debt) is owned by both. I don’t think a credit card company, even in a community property state, would have much teeth is trying to collect on credit card debt from an ex-spouse who never signed the credit card application. But, of course, I may be wrong.
Your second paragraph is a scenario which, I am sure, happens quite often. Many rich widows have wealth earned by their deceased spouses, so if they re-marry, that wealth now is accessible by the new spouse.
About prenups…I have never thought they were a good idea unless a very large estate is involved. However, you make a good point in that such an agreement may flush out problems which may surface until after the couple was married.
Thanks for the response Joe. Yes, in a community property state debts as well as assets are reviewed.
For a young couple starting out together a prenup may not be necessary. However, if it is a second marriage for either and children from a previous marriage are involved whether young or adults issues can arise especially when one had assets before the marriage. Another issue can be when one receives an inheritance. Things can get messy and often the people divorcing do not have the kind feelings toward one another as when they married. Some states are not only community property but also no fault divorce states there is much room for one to take advantage of another. As 50% of all marriages end in divorce people should be aware of the legal financial conseqences. A loving couple should be able to discuss these things without offense before marriage.
Carol,
Thanks for further explaining how community property states function. I looked it up on Wikipedia, but never could find where the debt, as well as the assets become “community”.
You also give some compelling reasons for prenups, especially with second marriages when children involved. My mom, a widow, married a widower 13 years ago when they were both the tender age of 78. 🙂 Both have children, so a prenup was almost a no brainer. By the way, they are both still alive and healthy.