Ask the Law Librarian: The Perils of Co-Signing Loans
Q. I co-signed my sister’s car loan. She made payments for the first two years, but now she is unemployed and I’m worried she might not be able to make the payments. What rights do I have? If I have to make the payments, do I at least get the car?
A. It sounds like you are well aware that if your sister doesn’t make the payments, you will have to. Sometimes people co-sign a loan as a favor, without really understanding just how big a favor it really is – the co-signer isn’t just vouching for the borrower, or offering to pay half the debt, but is actually accepting responsibility for paying the whole debt if needed. Once the borrower misses a payment, the creditor can go after the co-signer without even trying to get the money from the borrower first. Read the FTC’s brochure “Co-signing a Loan” for more information about the risks of co-signing and possible protective measures.
California law also gives you two additional protections. The creditor cannot report you to a credit reporting agency unless it also gives you written notice of the delinquency before or at the same time. And before the creditor provides any information about your obligation to a debt collector, it must first give you written notice of the delinquency. (Cal. Civ. Code 1799.101.) If the creditor fails to give this notice and your credit is injured or you lose money as a result, you can sue the creditor for actual damages or $250, whichever is greater, plus reasonable attorney’s fees. (Cal. Civ. Code 1799.102.)
So what happens if you do in fact end up paying the loan (or worse, being sued for the debt)? You are entitled to sue your sister for repayment. Of course, you may have no more luck collecting than the creditor did. If it does come to that, talk to the Small Claims Advisor if the amount is less than $7,500, or come in to the library to research your options.
You probably can’t get ahold of the car, unless you are listed as a co-owner on the title. Actually, it’s pretty likely that if your sister does default, the creditor will repossess the car, sell it, and come after you and your sister for the remaining balance on the loan.
If you actually want the car, maybe you can buy it from your sister and take over the payments. This could save everyone’s credit rating, although Sis might end up taking the bus for a while.
Do you have a question for the County Law Librarian? Just email email@example.com. If your question is selected your answer will appear in next Thursday’s column. Even if your question isn’t selected, though, I will still respond within two weeks.
Coral Henning, Director
@coralh & @saclawlibrarian