Options are few when a co-signed credit card goes bad

When you co-sign, a big debt can become yours

By Erica Sandberg

Opening Credits

Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com. Ask a question. 'Opening Credits' stories

Dear Opening Credits,
I got my daughter a card in 1994 with a credit limit of $300. I was unaware that she had kept this card all of these years. In August of last year, she defaulted on this card. However, the balance is now $29,000. And the issuer has come after me. It wasn't until November that I even knew anything about this. I did not know the number of the card nor have I ever received any statements regarding this account. Again, I was not aware that she still had the card.

I am on Social Security and my wife is on disability, and there is no way we can pay this debt. My daughter will not talk to me about it. And her husband told me that the best thing I could do is get a lawyer. I have worked very hard to maintain my credit, and this has destroyed me. The card companies that I had have all lowered my credit limits, and that is not the bad thing. It is my name that I worry about so very much. I have done without many times to make sure my bills were paid and on time. The card company wants to settle, but they will turn it in as a bad debt anyway, and then they want to give me a 1099-C tax form for that amount of money. I just don't have that kind of money. Is there anything I can do to save my name? -- Paul

But don't think you are free of some culpability. While you were being generous, you also dropped the ball. Because you willingly guaranteed this account, you ought to have kept an eye on where it was bouncing -- which, by the looks of things, was all over the shopping mall.

Before getting to resolution options, I want to cover what likely happened.

The credit card that you co-signed for your daughter started out with a low credit limit, but over time, the issuer must have increased it. This means that she must have used it appropriately for a while. However, she eventually charged too much and stopped making payments, causing the account to go into default. Since she abdicated responsibility, they turned to you. On the original application, you not only agreed to have the statements sent to her rather than you, but to pay up if she faltered.

I'm not rubbing salt in your wounds, but I must point out that you would have been aware of the mounting mess long ago had you regularly checked your credit reports. You'd have seen everything, from the monthly payment history to the current balance. As soon as you saw that she was out of control, you could have stepped in and stopped her.

Now what to do? It doesn't appear that anyone is willing or able to pay the debt in full, which would be the best-case scenario. A debt settlement is on the table, however, and that might be fine, too, even with the tax issue. Your credit is already negatively affected, and the financial break might be worth it. Still, you'd need the lump sum, which no one seems to have.

That charming son-in-law of yours did present an interesting solution. Normally I don't hesitate to suggest legal action in these scenarios, but I sense a problem. The debt is too high for small claims court, so you'd probably have to involve lawyers, who tend to be pretty pricey. More, if your daughter and her husband have no assets, collecting on a judgment will be tough even if you do sue and win.

An alternative is to ask the creditor if they'll resume installment payments. If so, perhaps you can write the checks and have your daughter reimburse you. This could stave off a lawsuit against you -- which is a real possibility. Then again, you and your wife don't have attachable wages or bank accounts bursting with money, so they'd be unable to collect, too.

Another option is for your daughter to file Chapter 13 bankruptcy. With a Chapter 7 bankruptcy, the entire debt might land in your lap, but with a Chapter 13, she can pay on it and you'd be protected. Of course, you can't force them to file -- and it might not even be appropriate -- but if it works, it could help all of you get back on track.

Finally, regarding your name, let "saving" it go. Do not define yourself by your credit score or history. You've been a good dad, who did his best to help his daughter but may have trusted her too much.

Erica Sandberg's articles and insight are featured in such publications as the Wall Street Journal, Pregnancy, Babytalk, Redbook, Bank Investment Consultant, Prosper.com, MSNMoney.com, and Smartmoney.com. An active television and radio commentator, Erica is the credit and money management expert for San Francisco’s KRON-TV, a frequent guest on Forbes Video Network, Fox Business News, Businessweek-TV, and all Bay Area networks. Prior to launching her own reporting and consulting business, she was affiliated with Consumer Credit Counseling Services of San Francisco where she counseled individuals, conducted educational workshops, and led the media relations department. Erica is a member of the Society of American Business Editors and Writers, and on the advisory committee for Project Money.

Send your question to Erica.

Published: February 16, 2011

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