Five years ago I helped a friend out by co-signing for his vehicle. He is now $2,000 behind on the payments, they are looking to repossess the car and won't settle for anything less. The company suggested a loan program to help refinance his payments, but he owes $4,000 more than the actual vehicle is worth, so they denied his application. What is the best option to help him, and is there a way to get me off this loan? -- Lily P. Kissimmee, Fla.

It's wonderful you tried to help out your friend, but your situation illustrates why co-signing a loan is almost always a bad idea. The best thing you can do for your buddy — and for yourself — is this: Catch up on the payments yourself and keep making them until you can sell the vehicle and pay off the loan as best you can.

That may seem like a grim course of action, but your options are limited, says Clarke Balcom, a Portland, Ore., attorney who specializes in cases involving consumer and business debt. When you co-sign a loan, you're fully responsible for the repayment of the loan, and you can't just get your name off the paperwork. That's the very essence of a co-signer: A second person to collect from if the first doesn't pay. (Someone who needs a co-signer, to use 20/20 hindsight, is precisely the type of person you do not want your finances tangled up with.)

The ramifications can be nasty, explains Balcom. For one thing, any late payments, repossessions or collections can show up on your credit report in addition to your friend's. And, if the vehicle is repossessed, the likely outcome is that it will be towed to an auction yard, held for a required number of days then sold for a very low amount — often for thousands less than the vehicle would ordinarily bring. A vehicle with a remaining loan balance of $16,000 — a car that might sell for $12,000 to a private party — could go for as little as $6,000 at auction. That would leave a $10,000 deficiency that the lender could then collect from either co-signer. If that money isn't paid voluntarily, the creditor could file a suit against both you and your friend to collect.

So bite the bullet, do what you can to bring the payments on the car back on schedule, and try to sell it. And, as you have probably already figured out, in the future, look for ways to help out your pals other than co-signing.

— Jeff Wuorio

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