Someone once said "neither a borrower or a lender be". That person probably would have trouble keeping pace with today's economy. Much of American business is structured upon the consumer's ability to obtain and manage one's credit. Most Americans borrow to buy their home and car, quite a few have credit cards and charge accounts. The trick these days is to keep your credit under control so you have a good credit history and avoid borrowing more than you can afford to pay back.

This is why the idea of co-signing or guaranteeing a loan of any kind is particularly scary. This issue may arise in a variety of situations. Perhaps a relative wants to buy a car or a house; maybe just take out a credit card to establish credit. Here's the scary part: a co-signer is equally liable for the balance of all unpaid principal and interest. You are not just vouching for the reliability or creditworthiness of the borrower, you are agreeing to pay the debt if he or she falters. True, that house or car isn't in your name and you got no direct benefit from the loan, but the lender has relied upon you to pay the debt - every nickel it could have otherwise collected from the borrower. In fact, I just read that the co-signer's liability applies to credit cards where an authorized user has been added.

Sometimes this scenario may seem unavoidable. Maybe you have a small corporation and the bank insists on a personal guarantee to finance the business. That's not unusual. Don't hesitate to ask questions if the lender wants your spouse to sign a guarantee, as well. If the spouse isn't part of the company, requiring him/her to co-sign might violate federal regulations. Read any guarantee carefully. You want to be notified if there is a problem with the payments before the problem becomes critical. Some documents include waivers of notice that can leave you clueless until its too late to cure a delinquent loan. Of course, you might assume that the friend or relative you went to bat for would let you know about any problems, but our experience indicates that's not always something you can count on.

How about if the borrower files bankruptcy? Mostly bad news. If the debtor files a Chapter Seven to wipe out debts completely, the creditors can pursue a "co-debtor" immediately. If he/she attempts a Chapter 13 plan to repay debts over a period of time, it depends. The debtor has to specify whether the debt will be paid from the plan or if the co-debtor will pay. Often, if its up to the co-debtor to pay or the co-debtor got a benefit from the loan, the lender can get a court order authorizing it to pursue the co-debtor.

So, if you are ever asked to co-sign, consider these ramifications. Know who you are dealing with. Consider what will happen in a worst-case scenario and explore other available options.

The above commentary is provided for general information only and is not intended to serve as legal advice. No person can become a client merely by reading this material. An attorney-client relationship will only occur by express mutual agreement. For more specific information, the recipient must directly contact an attorney.

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