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Co-signed a loan gone bad? Here's what you need to know

 
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July 28, 2014
Ask Eva
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QDear Eva,

I'm a home-ownership counselor for NeighborWorks. I received a call from a client who co-signed for a friend's car loan. Long story short, the young lady was notified today that her wages will be garnished (vehicle was repossessed, client did not know). What are her options? –Sahara

AHi Sahara,

Unfortunately, your client is not the first person who has gotten in financial trouble from the seemingly harmless gesture of helping a friend out. Many co-signers don't realize they have as much responsibility for that debt as the person they co-signed for.Ask Eva

In the case of your client, it's even worse, because it is now very late in the process, and the damage is done. Once the car has been repossessed and an order for garnishing wages has been issued, the debt collection has already gone through the courts. In addition to suffering the financial burden of repaying the loan, her credit score has been damaged, since the default on the car loan payments will be reflected on her credit report as well.

Is there anything your client can do? It depends. Co-signers do have rights, and if these were violated, she will have recourse.

By law, creditors must give both the debtor and the co-signer notice of the actions they intend to take to collect on a debt, and give both parties the opportunity to settle the debt. If your client did not receive some of the notices required, she may be able to challenge the deficiency judgment that led to garnishing her wages.

At each stage of the repossession process, your clients should have been notified. Ask her:

  • Was she given a notice of the late payments and the right to address them?
  • Was she provided with a notice giving her the option to redeem the car?
  • Was she given notice of the sale of the car and how the creditors were planning to sell?
  • Was she provided with a statement of the remaining balance left on the loan after the car was sold?

People who are in military service enjoy special protections as well under the Service Members Civil Relief Act of 2003, aiding both the person who took out the loan as well as the co-signer. If the car loan was taken out before the person entered the military, the car cannot be repossessed while that person is in military service.

The requirements for providing written notices vary somewhat from state to state. If your client thinks she may not have gotten some of the notices she should have received, one option is to help her get in touch with a pro bono lawyer.  The lawyer can also check if the repo sale was done in an honest and fair way.

Sadly, it's possible your client didn't just wake up one morning to find her wages garnished. There are many rules protecting consumers during debt collection, but when people find themselves in the situation your client is in, it can be because they ignored written notices intended to protect them. Because she has opted to seek help so late in the process, her options now are severely limited.

Since you are a home-ownership counselor, chances are that your client may have sought your advice because she is concerned about how the wage garnishment impacts her ability to pay her monthly mortgage payments.

You can help by looking at her finances to see what kind of hardship this puts her under, as well as where she can cut back to free up money for those debt payments.

This is a complex case, so you may consider referring her to a nonprofit credit counseling agency, particularly if she has other debts. Such an agency can help her restructure her finances and, in some cases, negotiate with creditors for reduced or consolidated payments.

Got a question for Eva? Send her an email.


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