So you agreed to cosign a loan for a friend or relative, but they couldn't keep up with the payments. Regardless of whether you co-own the property or help out with the payments, you now have to pay the full amount due each month to prevent your credit score from taking a hit. You probably won't get out of this without paying something, but there are some steps you can take to minimize the damage.
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Request a forbearance
A forbearance is a short break during which you don't have to make loan payments, though interest continues to accrue. It's a temporary fix at best, but it can give you and your co-borrower some time to come up with the funds. If the loan has already defaulted, the creditor may not allow this, and if it does, a forbearance will only buy you a month or two. The exception is federal and private student loans: You may be able to obtain a forbearance of six months to two years for these.
Sell the asset
It's possible to recoup most or all of the money for the loan if you sell the asset you purchased with it. Unfortunately, this isn't an option for student loans or leased property like apartments, and homes and cars usually take time to sell.
Because your co-borrower is the owner of the asset, he or she will have to either sell the item or sign the deed or title over to you so you can sell it. If the co-borrower is unwilling to do this, you will have to find another way to pay back the loan.
Even if the primary borrower is willing, selling property with a lien on it is complicated. Once you've reached an agreement with the buyer, you'll have to pay off the balance of the loan, and your lender will have to sign off on the sale. Some buyers may not want to jump through those extra hoops.
If you manage to successfully sell the asset, you're still responsible for paying any remaining balance on the loan.
Take out a personal loan
Your co-borrower should check to see whether they can take out a personal loan to pay back the defaulted loan. Doing so will relieve you of any responsibility, because the new personal loan will be only in their name. Your co-borrower may also be able to negotiate better payment terms on the personal loan, allowing them to pay it back without help. Chances are their credit will be too poor to do this if they've already defaulted once, but some lenders will make exceptions if they have had a good relationship with your co-borrower in the past.
Refinance
Asking your co-borrower to refinance the loan is a smart move if they're willing to pay back the loan but need a lower monthly payment in order to do so. It's not wise if there's a chance they could default again: Then you'll end up paying even more in interest over the longer term of the refinanced loan.
This won't remove your name from the loan, though. Your co-borrower won't likely be allowed to refinance alone, especially after they've already defaulted once, so you'll be in the same position as before. However, you may be able to secure better repayment terms.
Unfortunately, because you are not the owner of the asset in question, you won't be able to refinance the loan without your co-borrower's permission unless they sign the deed or title over to you. If they're willing to do this, and you're comfortable accepting full responsibility for the loan, refinancing could be a smart move if you can get a lower interest rate.
Offer a lump-sum payment
Many creditors are willing to free you from your debt if you're willing to pay a lump sum right away. It doesn't have to be the full balance of the loan; a good starting point is to calculate how much of the principal you still owe and subtract the amount that you've already paid in interest. Your creditor has the right to reject your offer or counter with one of their own. If you do reach an agreement, be sure to get a record of it in writing.
Declare bankruptcy
This step is a last resort and should only be used if you're unable to keep up with the payments. Before you declare bankruptcy, you should speak to a bankruptcy attorney and make sure you understand the consequences of this action. It will get you out of paying for most loans, unless it's a student loan, but it will also hurt your ability to get a loan in the future.
You should note that if you declare bankruptcy and the loan in question is a private student loan, there's a chance that the lender could declare the entire balance due immediately and go after your co-borrower. If they're not able to pay the balance in full, the account will go to collections. There's nothing you can do about this, but you may want to alert your co-borrower of the situation before you declare bankruptcy.
