Dear Bankruptcy Adviser,
My son-in-law was previously married. His ex-wife had nine months to refinance the mortgage on their marital home and remove his name from the mortgage. Instead, she filed bankruptcy. Long story short, he is going to have to file bankruptcy, too. I want to buy a home with my daughter -- but not my son-in-law -- on the mortgage. Can we be held responsible for anything to do with my son-in-law's bankruptcy? They will live in the house with me.
Dear Linda,The short and sweet answer to the question is "no." You and your daughter will not be held responsible for the debts in your son-in-law's bankruptcy. The only way you would be responsible is if you or your daughter had your names and Social Security numbers on one or some of his accounts. However, simply being related to him doesn't make you liable for his unfortunate situation.
The bigger question is whether you -- or your daughter -- can help him recover from his bankruptcy. To be frank, you or your daughter will have to take on some financial risk if you decide to help him. This is because it would likely involve co-signing loans with him. You or your daughter would risk your good credit to help him improve his less-than-good credit.
I think co-signing is very risky. And in the vast majority of cases, I think the risks greatly outweigh the benefits. You are taking on the potential responsibility to pay on a debt while receiving little benefit. If the payments are not made, the lender will look to you first to make payments. If there's a lawsuit brought, lenders will usually sue the co-signer before the primary borrower.
Here's why: The co-signer is the reason the loan was approved, and is also more likely to have a stable job and recoverable assets. My goal is not to scare you out of helping your son-in-law. I am only pointing out the possible pitfalls to make sure you proceed cautiously.
Here are two rules I spell out to my clients: If you co-sign for a car, make it the cheapest, most reliable car possible. If you co-sign for a credit card, make it the lowest limit possible.
If co-signing for a car loan, look for models -- and loans -- in the range of $6,000 to $8,000. Try to spread the payments over at least a 24- to 36-month term. In the chance you end up paying for the car, at least the payment will be low and you may be able sell it for close to what is owed.
With credit cards, even $500 is helpful as long as the issuer will report the credit line to all three credit bureaus. That way, his credit score improves each month with all three of the credit reporting agencies. You will want to find a lender that will allow him to get his own credit card within a year. That way, you help him build a good credit history but eventually remove yourself from his financial life.
But let me add another option: You can take the more cautious route and make him re-establish credit on his own. Your question shows that you are concerned about whether his bad credit could harm you. Therefore, you may just want to avoid helping him at all.