Co-signers

When you co-sign, you pay if the primary borrower doesn't. 

In analyzing the rights and duties of co-signers, the first step is to determine if the co-signers wished to obligate themselves directly or merely wished to act as a surety or backup, in other words, to pay only if the primary party did not. For example, if two brothers join together to buy an apartment building as an investment and they co-sign on a promissory note, there is no surety arrangement because both are considered principal or primary debtors.

On the other hand, the co-signer may have been merely promising to pay another party's debt. For example, if a teenager buys a car, signing a note for the unpaid balance, the car dealer would normally request a parent or other responsible adult to co-sign on the note. The parent is not incurring his own debt but guaranteeing the debt of another.

If a co-signer on a debt is clearly acting as a backup, the cosigner may be either a surety or a guarantor. A co-signor acts as a surety when a promise is made directly to the creditor. Normally a creditor can seek payment directly from the surety without suing and executing a judgment against the debtor. Surety agreements do not normally have to be in writing.

If the co-signer is acting as a guarantor, the co-signer is secondarily liable and will only have to pay after the creditor tries unsuccessfully to get the funds from the debtor. The guarantor's promise must normally be in writing to be enforceable.

Co-signers can normally assert the debtor's defenses against the creditor. For example, assume that Jones has guaranteed Travis Furniture's note to Pine Manufacturing, its supplier. If the facts permit, Jones can assert any of Travis' defenses, including fraud or breach of contract on the part of Pine.

When an individual or an agent of a business signs as a co-signer on a negotiable note, check, or draft, that person becomes liable along with the original debtor.

Planning tip: Co-signers are not protected in a bankruptcy unless an individual debtor has elected Chapter 13 protection. In other bankruptcy chapters, creditors can proceed directly against the co-signers when the original debtor declares bankruptcy.

Outside bankruptcy, a co-signer can sign a promissory note as an accommodation endorser, in other words as a backup. If the backup endorser signs her name and the words "collection guaranteed," then the creditor must sue the debtor, win in court, and be unable to collect anything before the creditor can collect anything from the backup signer. Alternatively, if the backup signed and added the words "payment guaranteed," then the creditor can proceed directly against the backup endorser rather than proceeding first against the debtor.