Why co-signing on a card for an ex is a mistake

By Sally Herigstad

To Her Credit

Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Steward Radio and other programs. See her website SallyHerigstad.com for more personal finance tips and free budgeting worksheets. Ask Sally a question, or read her previous answers in the To Her Credit archive

Dear To Her Credit,
I co-signed for my ex-husband so he could get a credit card after our divorce. He failed to make his payments, and then he passed away. We were divorced three years before he died.

The collection agency is showing a default in my credit report. They say that to clear my credit report and to get back to my 818 FICO, I have to pay his debt because I am a co-signer. I feel horrible paying that debt because if I do it seems like I am accepting responsibility for it. I don't think I am responsible for it because I did not use that credit card.

Help me, please. I'm 75 years old, and I need my credit score as high as possible so I can refinance to a lower interest rate. Thank you for your care.  -- Annie

Dear Annie:
The trouble with co-signing on a loan or credit card account is that, unfortunately, you really are responsible for the balance. That's what co-signing is all about. The credit card company, and now the collection agency, don't care that you didn't use the card and didn't get any benefit from it. They extended the credit and paid for your ex's purchases based on your good signature on the application.

You're not alone in this predicament. More often than not, co-signing turns out badly. According to the Federal Trade Commission, three out of four co-signers end up having to pay the bill themselves. That's pretty bad odds! And even if your ex hadn't failed to make his payments, you are still stuck with the bill because he died before he paid it off.

If you have the money to pay the bill -- without jeopardizing your needs or your emergency fund -- you should go ahead and do it. It's a painful lesson, but it's the fastest way to put unpleasantness behind you, rescue your credit score, and keep the balance from getting ever larger with interest and collection fees.

If you can't afford to pay the bill, you may be able to settle with the collection company. The fact that you are past retirement age should help you make your case.

Harry S. Margolis, a Boston attorney and president of ElderLawAnswers says, "Often, older cardholders can work out a deal with credit card companies, usually to pay 50 cents on the dollar."

Settling for less than the full amount is not a perfect solution. It will be noted on your credit report and make it harder for you to refinance at a good rate. And, Margolis reminds us: "She should be aware, however, that if the company writes off any of the bill, she will get a 1099 for the difference." Form [%Link?type=article&id=3389&text="1099-C is used by creditors to report forgiven debt"%] that the IRS assumes is taxable income to you unless you can show otherwise. If this happens, I would make a strenuous case that, because you didn't receive anything from the purchases made on the credit card, you should had no actual gain from the forgiveness of the debt. (See IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments for more information, or talk to your tax professional.)

If there's no room in your budget to pay anything, the collection agency may agree to write it off. Margolis says, "If she's creditor proof -- has no money to pay the bill -- then she can probably get them to waive the entire amount owed, since you can't get water from a stone." Of course, not paying a debt -- even if it's the only unpaid debt on your report -- would damage your credit score.

If you can't resolve this debt, please visit a credit counselor. I recommend finding a nonprofit agency affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. They can help you explore all your options for dealing with this debt and putting it behind you.

See related: Options are few when a co-signed credit card goes bad, 4 questions to ask before you co-sign on a credit card, Escaping co-signing: How to get out of a co-signed loan, credit card, What happens to credit card debt after death?

Gary Foreman, "New Frugal You"

Sally Herigstad, "To Her Credit"

Cathleen McCarthy, "Cashing In"

Jane McNamara, "Let's Talk Credit"

Elaine Pofeldt, "Your Business Credit"

Erica Sandberg, "Opening Credits"

Published: April 15, 2011

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