My grandmother recently passed away at age 88. Grandma’s passing was difficult, but it was easier than it could have been because grandma’s powers of attorney and living will were previously prepared.
When we lose a loved one, we often remember the gifts that the loved one gave to us while that person was alive. My grandma was financially poor her whole life, so she had virtually no physical things to give anyone.
However, a few years ago, grandma gave my family the most amazing physical gift that a nerdy, business attorney like me could fathom. My grandmother gave us the loan documents from when grandpa and grandma married and bought their farm in the early 1950s.
What struck me most about the documents was that they included the name of my great-grandmother. Because my grandparents lacked a credit history and other assets from which the bank could collect if there was a default, my great-grandmother cosigned their loan.
Nowadays, too, parents will cosign their children’s loans, including and especially student loans. Parents often think that cosigning a loan means that the lender will not pursue the parents until the children have paid as much as possible. However, in some cases, cosigners can be pursued for money before the actual borrower is even asked for money.
Practically speaking, cosigners and guarantors both “guarantee” repayment of loans. Typically, therefore, borrowers, cosigners and guarantors are equally responsible for the debt, if the borrower does not repay the debt.
Of course, cosigners and guarantors can seek reimbursement from the borrower if the cosigners or guarantors, instead of the borrower, are forced to repay the loan. However, if the borrower is someone from whom it is easy to collect, the lender would have just pursued the borrower to begin with, instead of the guarantor or cosigner.
In some commercial transactions, guarantors may only provide limited guarantees. That limitation may be a certain dollar amount or a certain asset. For example, if a developer borrows a million dollars for a small shopping mall, the lender may request a guarantee from a guarantor. That guarantor may agree that if the loan is not repaid, up to $200,000 of the loan amount can be made the responsibility of the guarantor. Alternatively, the guarantor could agree that if the loan is not repaid, the lender could only recover from the guarantor the possession of another asset, like an investment property or a certain mutual fund account.
Usually, though, for student loans and most other loans, any guarantor and cosigner is equally responsible with the borrower for full loan repayment. There is generally no responsibility that the borrower first be sued or be legally or practically “broke” before money is sought from the guarantors or cosigners.
It is often morally proper to cosign or guarantee loans for other family members. However, cosigning or guaranteeing a loan should be thought of as a promise to the lender that is as serious as the borrower’s own promise to repay the loan.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-523-5523. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.