Skip to content
Cosigning a loan for someone can be a generous act, but it also means taking on some responsibility for the debt. The question: “Does being a cosigner affect my credit?” is a common concern. Knowing the impact of being a cosigner can help you manage your finances better and avoid unexpected surprises. This is especially true if the primary borrower faces financial challenges, such as Bankruptcy. Let’s explore how you can protect your finances and credit rating as a cosigner.
Joint Debt
Credit can be set up in different ways; in one person’s name only, be joint, or have a cosigner or guarantor. Joint borrowers, cosigners, and guarantors are responsible for the payments if the primary borrower doesn’t pay.
Some types of credit are secured by an asset, such as a home or vehicle, while others are unsecured. Common types of secured credit, which can be sole or joint, or have a cosigner or guarantor, include mortgages and car loans. Unsecured credit can be set up the same way, and includes:
- Credit cards.
- Personal loans.
- Lines of credit.
- Overdraft protection on bank accounts.
There are four common reasons why someone might ask you to cosign a loan:
- The borrower has no credit history, so they ask someone who has good credit to cosign.
- The borrower has poor credit, and the lender won’t approve the debt without a cosigner.
- They might not have enough income of their own to support the loan.
- The loan helps both of you, such as buying a home, buying a car, or consolidating debt.
Cosigners, guarantors, or joint borrowers sometimes don’t expect to make payments because the other borrower has agreed to do so. As a cosigner, you may not be aware of any struggles the primary borrower faces if you keep your finances separate. However, if they miss payments, you’ll soon hear from collectors.
If you have cosigned debt with your spouse and your spouse declares Bankruptcy, it’s essential to know that both of you will be impacted, whether you are a joint borrower, cosigner, or guarantor.
Can just one spouse declare Bankruptcy?
It’s quite common for married partners to keep their finances separate. Spouses sometimes do this for privacy or because they have different spending habits. One spouse might have a business that isn’t joint with their spouse. They may each have investments, assets, and debts in their own names.
One spouse can file for Bankruptcy. Any assets they have that exceed provincial exemptions will be turned over to their Licensed Insolvency Trustee and sold. The trustee will distribute the proceeds from the sale of the assets to the creditors to pay down their debt. The remaining debt will be written off. This process will significantly affect their credit score by lowering it, and it may take several years to bounce back.
Does Bankruptcy affect my spouse in Canada?
One major concern you may have if you’re thinking of declaring Bankruptcy is “Does Bankruptcy affect my spouse?” The answer is: It can affect your spouse if your debts or assets are joint. If your debts are solely in your name, your spouse will not have to repay what you owe.
Similarly, creditors can only take assets that belong to you. If you have no joint assets with your spouse, they will not need to sell theirs to pay off what you owe.
How does Bankruptcy affect a cosigner?
When a lender sets up any type of credit in two names, each party is expected to pay, and each is responsible for 100% of the debt. Understanding this can help you recognize the financial risks involved with joint debt and cosigning agreements. The lender is not concerned with personal arrangements you have made with the other borrower, such as a separation agreement.
If the primary borrower files for Bankruptcy, the responsibility shifts to you to make the payments on the remaining amount. The Bankrupt borrower will have their obligation to pay the debt removed as part of the Bankruptcy. Repaying the debt on your own can create serious financial problems for you, especially if you weren’t expecting to be responsible for the debt.
If the loan is secured by a vehicle, you might be able to keep the car as long as you continue making payments. If you own a home and your equity in the home is greater than what your province allows, your home will be sold and the equity divided between you and your spouse. You will keep your share of the equity, but your spouse’s share will go to their creditors.
Does being a cosigner affect my credit?
The answer to “Does being a cosigner affect my credit?” is yes! Being a cosigner means the debt shows up on your credit report, too, which in turn, affects your credit score and borrowing capacity.
Lenders report your payment history to the credit bureau. If payments are missed or late, it will negatively affect both you and the primary borrower’s credit scores.
It also affects your debt-to-income ratio (TDI), reducing how much you can borrow. Your TDI is the maximum percentage of your gross income that you can borrow. If you apply for new credit, the lender will factor in your joint debt payments, and that might push you over acceptable limits.
Can I Get My Name Off The Debt?
If you’re wondering how to get your name off a loan you cosigned, know that lenders typically won’t just remove a cosigner without a formal process. They’ll usually require the remaining borrower to apply for a reassessment of credit to ensure they can manage the payments independently.
They must meet all the criteria to take over the debt in their own name, including:
- A stable source of income.
- Enough income to make the payments
- An acceptable credit rating.
- An asset to secure the loan, if necessary.
Knowing this process can help you understand your options for protecting your credit if you want to exit a cosigned debt. Being informed and proactive can help you make better decisions and protect your financial future.
Fortunately, help is available if you have debts you can’t pay. Licensed Insolvency Trustees at Allan Marshall and Associates have been helping cosigners with debt they can’t pay for over 40 years. Contact us online or call us at 1-888-371-8900 to book a free appointment. Our team offers legally binding debt solutions so you can put your debts behind you and start fresh.
