What to do if my son co-signed a school loan which is now in collections?

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What to do if my son co-signed a school loan which is now in collections?

I want to leave my house to him in my Will. Can the school loan collection agency take the house from him or place a lien against it after I die?

Asked on February 27, 2014 under Estate Planning, New Jersey

Answers:

FreeAdvice Contributing Attorney / FreeAdvice Contributing Attorney

Answered 7 years ago | Contributor

Risks of Co-Signing

While co-signing can be wonderful, it’s also risky. As a co-signer, you take responsibility for the loan. If the loan is not repaid as agreed, the lender will come after you. They’ll demand payment from you and report any problems on your credit reports. There’s a good reason that the lender requires a co-signer in many cases: because the borrower appearslikely to default. If you co-sign, you must believe that the lender (who probably makes more loans than you do) is mistaken.

Remember that the borrower doesn’t have to drop off the face of the earth for you to get into trouble. If a single payment comes late, the lender may come straight to you. They follow the path of least resistance – they can call you first if they think you’ll pay sooner than the borrower. However, they might not call you until things get really bad.

If the borrower fails to pay as agreed, your credit can suffer. A loan that you co-sign for ends up on your credit reports – the good, bad, and ugly. Late payments that weren’t your fault will appear as if they were your own problem. You get to choose whether to pay the lender yourself or to let your credit suffer.

Another pitfall of co-signing is that it makes other lenders think you’re borrowing more than you are. They know that you’re liable for your friend’s debt, so they assume you’ll have to pay it. They may think you have more dollars in debt than you really do, or that your monthly obligations are greater than they really are. This can affect your ability to get a loan of your own at some point.

If the loan that your son gets defaulted upon, he could be liable for its payment on a judgment where the house that you desire to leave hom could be subject to execution of a judgment levy if in his name. I suggest that you consult with a Wills and trust attorney in your locality about creating a trust to place the home in to benefit your son pending the loan that you have written about. Such an attorney can be found on attorneypages.com.


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