Can a Co-Signer Settle a Debt?

You co-signed a loan as a favor to someone you trusted. Now, the lender is calling you because the loan has gone unpaid. 

What can you do? Technically, you're legally responsible for the debt even though you're not the primary borrower. You're confused, worried, maybe a little angry, and you're wondering if debt settlement might be an option. 

The short answer is yes—a co-signer has the ability to settle a debt, and there may be some good reasons to do so. We'll walk you through how debt settlement works for-cosigned debts and the alternatives. 

What Is Debt Settlement?

Debt settlement is a legal way to pay off debts for less than what's owed. When you settle a debt, you ask the creditor or lender to accept a reduced amount. Once you pay the agreed amount, typically in a lump sum or a few installment payments, the rest of the debt is forgiven. 

Settlement is an opportunity to get back on track if a sudden financial hardship has kept you from repaying what you owe. You might be a candidate for debt settlement if you mostly owe unsecured debts, like credit cards or personal loans, and can't make your regular monthly payments. 

Debt settlement is different from other debt relief options, like debt management plans (DMPs), debt consolidation, or bankruptcy. Here’s a look at how each one works:

• A debt management plan is a structured plan to pay off all your debts over time. 

• Debt consolidation lets you combine multiple debts into a single loan.

• Bankruptcy is a court process that could allow you to discharge eligible unsecured debts so you don't have to pay them at all. 

Can a Co-Signer Settle a Debt?

Co-signers can settle debts when the primary borrower defaults, as long as the creditor or lender agrees to negotiate. You could negotiate a settlement with the lender yourself or work with a debt relief company. Settlement typically works best when both co-signers are on board, but you don't need the other person's permission to settle a debt if they've stopped making payments. 

What does it mean to be a co-signer? Legally, co-signers share equal responsibility for debts, regardless of who needs or uses the money. That means if you co-sign a personal loan for your brother so he can buy a car, you're both on the hook for repayment. 

If your co-signer doesn't pay, both of you could experience negative consequences. That includes:

• Credit score damage. Payment history accounts for 35% of your FICO credit scores. Since co-signed loans show up on both borrowers' credit reports, any late or missed payments could knock points off both your scores. 

• Collection calls. When a co-signed loan goes into default, which typically happens after a set number of days or months pass without payment, the collection calls, emails, and letters can start. As a co-signer, you have the right to ask a debt collector to stop contacting you but this won't make the debt go away. And unpaid collection accounts on your credit reports could do more damage to your credit scores. 

• Debt lawsuit. In a worst-case scenario, you could be sued for a debt that you co-signed for if the other borrower doesn't pay. If the creditor or lender wins a lawsuit against you, they could take additional steps to garnish your wages or freeze your bank accounts. 

Debt settlement can't prevent any of those things from happening, since a creditor doesn't have to agree to negotiate. Bankruptcy is the only thing that could put the brakes on collections and lawsuits, and that may or not be the right choice for you. If you're sued for a co-signed debt, you'll have an opportunity to submit an answer to a summons to make a case for why you shouldn't be the one to pay. Consult with an attorney licensed in your state.

If you're stuck with the fallout from an unpaid debt you co-signed, the best solution is for your co-signer to pay what's owed. Your co-signer could also refinance the debt to remove your name from the loan. If neither one is an option, you might try debt settlement to minimize the damage before you think about bankruptcy. 

How to Negotiate a Settlement for Co-Signed Debt

The first step to settle co-signed debt is to decide whether to do it yourself or get professional help. You don't need to hire a debt settlement company, but it could take a huge load off your shoulders if you lack confidence in your negotiation skills or you just want an expert on your side. 

Here's how the debt settlement process typically works with a debt relief company: 

• You share details about the co-signed loan with a debt relief expert, including the lender's name, the amount due, and when the last payment was made.

• Each month, you deposit a set amount into a secure dedicated account that you control.

• Your debt expert negotiates with the lender on your behalf.

• Once an agreement is reached, it comes to you for approval. If you approve, the debt settlement company uses money in your secure account to pay the settlement amount and the settlement fee. 

• The rest of the debt is forgiven, and your credit reports are updated to show that the account has been settled.

If you settle a co-signed debt, you may want to talk to an attorney about next steps. You might be able to sue your co-signer for the amount you paid to settle the debt. This is a tricky decision that requires a lot of thought since it could severely harm your relationship, if it hasn't been irrevocably damaged already. 

Also, be aware that settled debts could have tax implications that you'd need to take into account. You may owe income taxes on the forgiven debt unless you can prove you were insolvent when the debt was settled. Consult a tax professional for specifics on your situation. 

Still not sure if settlement is the right call? A debt expert can help you weigh all the debt settlement pros and cons so you make the most informed decision possible for you.