The
Corbett Law Firm LLC
JOHN
E. CORBETT,
ATTORNEY
AT LAW
___________________________________________________________________________________________
Phone: 1-856-767-0910
Fax: 1-908-847-0369
Email: CorbettLaw@corbettlaw.net
Website:http://www.CorbettLaw.net
MEMORANDUM
|
To: |
Users
of Lawguru.com Q&A Service |
|
From: |
John
Corbett |
|
Subject: |
Co-Signing
for Debts of Others and Loans to Friends |
You are probably reading
this because you have asked a legal question on Lawguru.com related to a loan
of money or property to a friend or a friend or relative has defaulted on a
loan for which you are a co-signer. Such
questions are not uncommon and I have written the following which may help you
understand the legal significance of your situation and its practical
limits. Please also see the caution in
the link at the end.
1.
Friends and the Law. With
the exception of spouses and children, the law generally gives no special
status to the personal relationship between you and another person with whom
you do business. That statement applies
to a fiancé, roommate, boyfriend, girlfriend, business partner, and virtually
anyone else with whom you choose to do business. Any person who borrows money from you is
obligated to repay it. Likewise, you
have no special rights against friends.
If a loan is not repaid, you can (a) await payment until your ability to
enforce the obligation expires (usually six years from the date of dishonor);
(b) negotiate different terms; (c) reduce the amount or write it off; or (d)
sue to get a judgment. Unless the amount
is small and you can afford to lose it all or write it off, it is a good idea
to at least consult with a lawyer because there are pitfalls in any of these
approaches that may adversely affect your rights.
2.
Co-Signing Loans. This
term needs some clarification. The
traditional use of a co-signer is as a guarantor on a loan of money. In that case, the co-signer has no
obligations on the loan unless the primary debtor fails to pay or otherwise
defaults. Similarly, if the debt is a
purchase money loan for some property (such as an automobile), the co-signer
has no rights to the property unless there is a default. In the event of a default, the co-signer has
the obligations that are described in the loan agreement (which must be in
writing and signed by the co-signer).
Usually, that means that the co-signer is obligated to pay the loan and
can be sued by the creditor and compelled to pay as if he or she were the
primary debtor. Usually, the creditor
will sue both the primary debtor and the co-signer in the same action. A creditor’s judgment is good against either
or both.
3.
Co-Signing Leases.
Sometimes people will join in a lease with another person without the
intention to occupy the leases premises.
This is sometimes incorrectly referred to as “co-signing the lease” but
the second party actually is a co-tenant and not a guarantor unless the lease
says otherwise. All tenants have a
present right to occupy the premises and the present obligation to pay the
rent. The landlord doesn’t care who pays
and is not required to take shares from the co-tenants.
4.
Co-Signer’s Rights. A
co-signer who has been damaged because of a primary debtor’s default has the
legal right to sue the primary debtor for compensation. Under some circumstances and if the court
orders it, the co-signer who becomes obligated to pay and actually does pay may
acquire rights in any property that was purchased with the proceeds of the
loan. That transfer of title is not
automatic and must be done by going to court, making the appropriate claims in
a Complaint, and getting a favorable judgment.
5.
Enforcing Friendly Loans. A
complication that often arises in the case of loans to friends is that there is
no written evidence. That can be very
unfortunate if the debtor is suddenly claiming that the money was actually a
gift or the loan didn’t happen at all.
The “Statute of Frauds” is a centuries-old rule of law that determines
when a contract such as a loan must be proved by a writing. Among those are contracts whose value exceeds
$500. So, if the loan is for an amount
that is more than $500 and the other party won’t admit to it, the debt must be
proved by a writing that is signed by the debtor and acknowledges the existence
of the debt. A formal promissory note is
not required; any writing that acknowledges the debt may serve as the basis of
a judgment. Without something in
writing, it is difficult for a judge to give you a judgment based on contract
law.
6.
Getting a Writing Where None Exists. Perhaps you are now regretting making a loan
to a friend who doesn’t seem to be able to pay.
Perhaps too you now realize that you should have gotten something in
writing because you have nothing to show a judge. All is not lost. Do what the commercial creditors and collections
agencies do in similar situations. Offer
to change the terms such as by extending the time to pay, but this time, get it
in writing. Any writing that
acknowledges the debt will do to satisfy the requirement of the Statute of
Frauds. The most useful evidence will
have a statement of the amount of the debt and a signed undertaking by the
debtor to repay it within a specific time.
A handwritten signature is best, but a person’s name on an email will do
if that person intended some symbol on the email to represent their signature.
7.
Gifts in Contemplation of Marriage. Breakups are common and often give rise to
disputes over money loaned from one party to the other gifts of property, or
payments by one party to pay for property in the name of the other. The Statute of Frauds also applies to gifts
in contemplation of marriage. That can
work both ways, so don’t assume anything before speaking with your lawyer. If a breakup occurs that leaves one party to
the relationship financially disadvantaged, there are sometimes remedies
available. The fact that the other party
has title to the property does not necessarily determine the result.
1.
Equity and Restitution.
This article is too limited for a full discussion of non-contract
remedies but you should know that, even if you do not have a writing sufficient
to enforce a loan as a contract, you may have other remedies. If the primary debtor has benefitted from the
proceeds of a loan that you guaranteed, you may have non-contract remedies that
will result in either being compensated for what you paid or for the value that
the primary debtor got. If you gave the
other person any money or property, a judge might order that it be given back
to you. If the primary debtor purchased
property with the money that you loaned or guaranteed, you may be able to get
title to that property or a legal interest in it.
2.
Relationship with Criminal Law. It sometimes happens that the default is no
accident. If you believe that you have
been duped or cheated by the person who owes you money, there may be a parallel
violation of criminal law. One common pattern
is when someone exchanges something of value for a check while knowing that
there will be no money in the bank to pay the check. Instances of fraud may fit within the
definition of the crime of theft by deception.
There are many other parallels. If
it seems to you that your circumstance is more than just a private debt and
that the same person is likely to do the same thing to someone else with the
intent to cheat them, there may be a criminal violation. In that case, you should consider contacting
your municipal prosecutor or filing a Complaint in municipal court.
3.
Practical Limits. All of
the above is tempered by the amount involved and the practical limits on the
primary debtor’s ability to pay. If he
or she could not pay the creditor, it is very likely that they can’t pay you
either. If there is property to be had,
you may have a practical remedy. The
same can be said if you can afford to wait until their situation changes or if
you know something useful about their finances.
However, loans to friends and loan guarantees often have unhappy
endings. If your friend was
credit-worthy, they would probably not have had trouble getting a loan for
themselves from a commercial creditor.
Since they could not or chose not to do so, it is clear that you are
taking more risk than those who are in the business of lending money are
willing to take. You should not be
surprised if the money is not repaid and difficult to collect.
4.
What Now? By now
you probably realize that whatever gave rise to your question was not a good
idea in the first place. You might feel
that you have been duped, cheated, or deceived and that you should have seen it
coming. Whether true or not, that will
not help you at this point. If you are
owed a large amount of money, you should generally consult with a lawyer before
deciding what to do. If the debt is
small, you can try to enforce it yourself in Small Claims Court. You are not the first person to be in this
situation (or I wouldn’t be writing this) and you will not be the last. You are not going to surprise your lawyer or
a judge by telling your story. You have
the legal and moral right to place the burden where it belongs – on the person
who owes you money or put you in debt by their default.
We sincerely hope that
the information that we have provided is of help to you. Please keep in mind that no information
given in a Q&A exchange can be relied on as legal advice for your unique
situation. If you need legal advice, you
should consult personally with a lawyer.
For further cautions and information on working with a
lawyer see: http://info.corbettlaw.net/lawguru.htm.
JOHN E. CORBETT
Attorney at Law
Copyright 2008, John E. Corbett