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Co-Signed Loan Default & Effect on Co-Signer's Credit

Mark Cappel
UpdatedOct 5, 2007

I co-signed on an automobile loan, the other person is behind on payments, What are my options to repair my score?

I co-signed on an automobile loan. The loan and title documents are with two individual names using "and/or". I do not have possession of the car, and the other person is behind on payments, or past due. I have recently found out that my personal credit score and rating has dropped considerably because I am attached to the loan. What are my options to repair my score and keep it from getting worse? Thank you!

First, regardless of your original intent at the initiation of this purchase, you seem to be a co-debtor on the loan, and a co-owner of the vehicle in question. You probably intended to act as a guarantor for repayment of the loan, but the creditor likely wanted to bind you closer to the transaction because of their insecurity about the other primary borrower's credit worthiness. They may have extended this loan against their better judgment because you were prepared to share full liability if the other person defaulted.

The creditor may have done you a favor by making it appear that you were an initiator of the purchase, in that it increases your options in regard to the debtor in possession of the car.

If the debtor is trying to take advantage of you and the lender by using the vehicle without paying as required, you can take possession of the vehicle by whatever legal means necessary. Depending on the number of payments already made there is a slight possibility that there is value in the car above the present balance of the account; however, it is rare for a regular financed car to develop equity until close to the end of the loan. If there is equity in the vehicle, you may decide to sell the vehicle, pay off the loan, and pocket the difference for your trouble.

Even if there is no equity in the vehicle, you may want to proceed with a sale, then pay the loan balance, or as close to the entire balance as your best sales result will permit. It is usually a bad financial decision to simply turn the auto in to the creditor, thus allowing the creditor to control the liquidation (sale) of the vehicle. The creditor will generally make little effort to maximize the sales proceeds. Most creditors do not care to expend any effort for the best sales result, since the account balance not paid by the proceeds of the sale will be declared a deficiency balance, for which you can be held liable.

You will likely be the one that the creditor will pursue for the deficiency, because, of the two original joint debtors now liable for the deficiency, you seem the most likely to pay because of your previous credit history. This deficiency collection effort by the creditor is a good example of why you will need a competent attorney to guide you through this process. There are restrictions on the collection of deficiency balances, depending on the law of your state, which your attorney should be able to tell you about. You should advertise, market and control the sale of the vehicle yourself in order to maximize the sale proceeds and minimize your prospective deficiency balance. It is best to notify the creditor in writing of each action you take toward liquidation of the collateral, but again your attorney can advise you of your responsibilities to the lender.

At the time of offering to pay the balance to the creditor, you should tell the creditor that you are clearing the account on condition that the creditor remove any negative statement regarding the account from your credit file at all 3 major credit reporting agencies. If the creditor refuses to do this, you may want to then offer that they continue to report the account to your files as, "paid." You actually have no right to demand any conditions to paying over the sale proceeds immediately, but you need to act like you have every right to negotiate the settlement of this account. Once the creditor agrees to a resolution of the debt, ensure that you have the agreed-upon wording contained in a short written agreement at the time of paying off the account.

Again, it is important that you consult with an attorney in your area to discuss your rights and obligations in regard to both the co-debtor and the creditor, as you do not want to make any assumptions that could cost you more money.

I wish you the best of luck in resolving this problem, and hope that the information I have provided helps you Find. Learn. Save.




CChris H, Jun, 2010
My comment is for Steve Pennington, Steve did the loan for your auto show on your credit? I co-signed for my son for the same reason you stated and we are just now (after a year of him making his payments) that it is not on his credit report.
BBill, Apr, 2009
I have not come across many instances of the IRS taking possession of vehicles and such, they tend to stick to other traditioanl means of getting their money back such as wage garnishments or withholdings.
I cosigned for my sons automobile loan a few years ago in order for him to build credit. He has since lost his job and owes two years worth of taxes to the goverment. I have been making his car payments for the time he has been unemployed. Can the goverment take his vechicle for back taxes even thou I have kept up payments on it?
BBill, Feb, 2009
If you are the primary (first) applicant on that loan, then it is pretty much your responsibility to get the loan paid back. I don't think your friend would be able to include it in his bankruptcy filing as he was not the primary loan applicant. You need to find out the details on the loan and pay back any past dues to bring the loan back to current status.
AAngela, Feb, 2009
I signed with what was a good friend 2 years. my credit better, I am first on the loan. He didn't pay for 2 months and then paid. Now is 7 days late, he is filing bankcrupty and now I am rushing trying to see if I can get the truck before I am liable and he is scott free. Help.....
NNithin, Jan, 2008
Be really careful when dealing with automobile loan lenders, they are known to have predatory lending practices and will go to any extent to make a sale. It makes sense that you will get a better rate if his name is first because I am assuming he has better credit than you. I not sure though, about equal credit going for the both of you. If he is listed as a primary loan applicant, then it will help his score more than yours. I would make sure that you are being listed as the primary loan applicant and you Father is only a co-applicant, only then will it help you to improve your rating.
ssteve pennington, Jan, 2008
i recently applied for an automobile loan and did not have the credit to get it. i had my father apply as the cosigner to secure the loan. i was told that i would have a better rate if my father was the first name on the credit application but that whatever credit was gained would be evenly appointed for both signers on the loan. the truck is in my name and i will be the only person making the payments. granted that i make all payments in a timely fashion and complete the loan will i recieve the same credit for the payoff as my father. one of the sole purposes of the loan was to gain credit throughout the transaction. any help would be appreciated.