Does a co-signer have to settle with a collection agency?


Dear Liz: My daughter co-signed a student loan for a friend who didn’t pay his debt. Now my daughter can’t refinance her house because this loan shows up on her otherwise very good credit reports. She receives calls from a collection agency.

I called the agency to discuss what it would cost to clear them of any liability for this loan, and they made me an offer of $13,000 to settle the debt, which is now $35,000 . I countered with $9,000, since the original loan was only $15,000, but they refused. My daughter is unhappy to pay anything because her ex-friend is a salaried lawyer. Is it a good deal to pay what the collection agency asks or do I have to keep negotiating?

Answer: That sounds like a pretty good deal, said financial aid expert Mark Kantrowitz, publisher of the FinAid and Fastweb websites.

“Lenders are almost never settling for less than the outstanding principal balance of a defaulted student loan, so that may be the best she can get,” Kantrowitz said. “They may offer her a small amount of settlement to release her from her obligation and then go after her former friend for the remaining debt. When there are two borrowers on the hook, a borrower reaching a settlement does not cancel the debt. It simply releases that borrower from their obligation.

Your daughter should have the settlement offer reviewed by a lawyer, Kantrowitz said. The attorney should verify that the collection agency has the authority to settle the debt, and any agreement should list all affected loans.

“I’ve seen cases where a borrower thought they were getting all the loans settled,” Kantrowitz said, “but the settlement was only for some of the loans.”

Ideally, the settlement agreement would require the lender to cease reporting default and defaults to credit bureaus, which would remove the stain from its credit reports. Not all lenders will agree to such a condition, Kantrowitz said, but withdrawing would be better for his credit than simply declaring the debt “satisfied.”

Also, the agreement should require the lender to provide your daughter with a “paid in full” statement as proof that her debt has been settled, Kantrowitz said.

“She should keep that statement forever,” Kantrowitz said, “because delinquent loans tend to resurrect from time to time, [such as when] a bank reloads its database from old backup tapes [or] someone looking through old records discovers the original promissory note.

A lawyer might also advise your daughter to take other steps, such as suing the former friend for reimbursement or reporting the issue to the state bar, which has standards of professional conduct that can be violated by an unpaid debt.

Late payment has an effect

Dear Liz: We are trying to negotiate our second mortgage and have not paid it since June. Will this affect my desire to buy a car?

Answer: It may not affect your desire to buy a car, but it will likely affect the transaction if you are unable to pay cash.

Failure to pay a credit obligation can devastate your credit scores, the three-digit numbers that lenders use to assess your creditworthiness. The worse your scores are, the less likely you are to find a lender willing to do business with you. Even if you can get a loan, it’s likely to come with an outrageously high interest rate.

Pay in IRA automatically

Dear Liz: I started a new job, but unfortunately it doesn’t offer a 401(k). I have an IRA but I don’t contribute to it. What’s the best way to contribute so I can discipline myself to save for retirement? I am 47 years old.

Answer: The best way to save for retirement is to leave discipline aside. If you have to discipline yourself to make the right choice every paycheck, you’ll end up spending the money rather than saving it.

Instead, put your savings on automatic. You can contribute $5,000 per year to your IRA. Divide $5,000 by the number of paychecks you receive in a year and set up an automatic transfer of that amount. If you get paid bi-weekly, for example, you would divide $5,000 by 26 paychecks to get $192.31, which is the amount you should have transferred into your IRA every two weeks.

If you can save more, open a regular brokerage account and set up automatic transfers to it. You won’t get tax relief for your contributions, but if you hold your investments for at least one year, you’ll be eligible for long-term capital gains rates that are lower than ordinary tax rates.

Once you’ve set up these transfers, you need to keep your hands on the money. Don’t treat your retirement funds as emergency money or dip into them for any other reason. You start late and you’ll need every dollar you can save if you want a comfortable retirement.

Questions can be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or by using the “Contact” form on Distributed by No More Red Inc.


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