Grandparents Never Say "No"
One of my favorite internet memes is a picture of an adorable toddler with the words, “Grandma, please come quick, everyone is telling me no.” As a grandmother, I am aware of the natural inclination to help and support one’s family members. However, as an attorney, there is one area where I draw the line when saying “yes” to family and friends: co-signing loan documents.
When a family member or friend comes to you asking you to co-sign a loan for them it should raise a red flag. Why? Because generally if someone needs a co-signer for a loan they do not have enough income to qualify for the loan they are seeking or their credit rating is very low which can be caused by late payments or missed payments. At a bare minimum, by co-signing you are promising to repay the loan if the borrower does not.
Many times grandparents are approached to co-sign on loans for cars, mortgages, student loans, or apartment leases. Under Maryland law there are other legal terms that may be used to make you a co-signer. The terms are: secondary obligor, surety and accommodation party. A secondary obligor signs a loan agreement and if the primary obligor does not make monthly payments the secondary obligor must make the monthly payments. A surety is legally responsible for paying the debt or perform the duty for a primary obligor. Under Maryland law a surety may bring a lawsuit against the primary obligor to obtain a judgment to recover the money used to pay the debt. An accommodation party signs a loan and receives no benefit, if there is a default on the loan the accommodated party may be sued to recover any payments made by the accommodated party.
Once a loan is in default, as the co-signer, if you do not pay the debt the lender may take action against you personally to recover the money owed. This action may include a garnishment of your income or bank account. As the co-signer your credit rating could suffer if loan payments are not made on time. Additionally, in some instances, if a loan is forgiven by the lender, the co-signer may be subject to personal income tax if the IRS deems it “debt forgiveness income”.
Under any of the scenarios discussed above the only recourse available to a co-signer once the loan is in default and you have used your money to pay the debt, is to file a lawsuit, go to court and get a judgment. In the alternative, as the grandparent unable to say no, you may require your family member to sign a Promissory Note/Confessed Judgment. If this document is executed and the debtor defaults and refuses to reimburse you for money you spent paying off the debt. You do not incur the additional expenses of filing a law suit, you simply file the Promissory Note/Confessed Judgment in the District or Circuit Court and a judge will issue a judgment order. Of course, all of this can be avoided if grandparents simply say no to being a co-signer.