The Risks of Co-Signing a Loan | What You Need to Know Before You Sign

If you’ve ever co-signed a loan for a family member or friend, you might think you’re just helping them get approved — but what happens if they stop paying or file for bankruptcy?

In this episode of Debt Free Life, Licensed Insolvency Trustee Richard Sklar from David Sklar & Associates explains the financial, legal, and credit risks that come with co-signing a loan in Canada. You’ll learn what happens to co-signers when the borrower declares bankruptcy or files a consumer proposal, why you’re still legally responsible for the debt, and what steps you can take to protect yourself before agreeing to co-sign.

Richard also shares practical advice on what to do if you’re already facing co-signing debt problems — including when to seek help from a Licensed Insolvency Trustee.

👉 Read the full article for more details:
 What Happens to Co-Signers With a Bankruptcy?

🎙️ Debt Free Life is brought to you by David Sklar & Associates, helping Canadians find relief from debt and take back control of their finances. Visit www.davidsklar.com
to book your free consultation today.

Transcript

Episode: What Happens to Co-Signers in Bankruptcy? | The Hidden Financial Risks Explained

Speaker: Richard Sklar, Licensed Insolvency Trustee – David Sklar & Associates

Welcome to Debt Free Life, brought to you by David Sklar & Associates.
I’m Richard Sklar, a Licensed Insolvency Trustee, and today we’re talking about something that seems like a small favour but can lead to big financial consequences — co-signing a loan for a family member or friend.

Maybe it’s helping your child buy their first car, helping a sibling qualify for a mortgage, or giving a close friend a boost with a loan. It feels good to help, but what happens if they stop paying or even file for bankruptcy?

Let’s look at what co-signing really means, the risks involved, and how you can protect yourself.

When you co-sign a loan, you’re not just helping someone qualify. You’re taking on full legal responsibility for that debt. If the borrower doesn’t make their payments, you’re responsible for the entire amount. Not half of it. Not part of it. All of it.

As long as the borrower makes their payments, you might not think about the loan again. But if they miss one, the lender will turn directly to you. You’re treated exactly like the main borrower in the eyes of the lender.

So what are the real risks of co-signing a loan?

The first is legal and financial liability. If the borrower stops paying, the lender can sue you to recover the money. They can garnish your wages, put a lien on your property, or freeze your bank account.

The second risk is damage to your credit. Because the loan appears on your credit report, any missed or late payments will hurt your score. And if the loan goes to collections, you could end up with an R9 rating — the worst rating you can get in Canada. That makes it much harder to qualify for credit later.

And finally, there’s the financial and emotional stress. Taking on someone else’s debt can put a real strain on your own finances. You might find yourself struggling to manage both your own bills and the co-signed loan, which can quickly spiral out of control. If the loan is large, like a mortgage, that stress could last for years.

Now let’s talk about what happens if the borrower files for bankruptcy.

When a borrower declares bankruptcy in Canada, they’re released from their unsecured debts — things like credit cards or personal loans. But that release does not apply to you as the co-signer. You remain fully responsible for the loan. The lender can still collect from you, and they can pursue you for the entire amount owed.

The same is true if the borrower files a consumer proposal. It helps them, but it doesn’t remove your obligation. Once the borrower enters bankruptcy or a proposal, the lender’s focus shifts to you.

You’ll still be expected to keep up with payments, even while the bankruptcy or proposal is in progress.

So what if you can’t manage those payments yourself?

If you reach the point where you can’t keep up, you may need to consider your own debt relief options, such as a consumer proposal or bankruptcy. If you file for bankruptcy, and the loan is unsecured, you’ll be released from that debt. That means you’ll no longer be legally required to pay it back.

Of course, bankruptcy has its own consequences — it can affect your credit for a period of time, and you may have to surrender some non-exempt assets. But it also gives you relief and a chance to rebuild. Bankruptcy isn’t the end; it’s a fresh start.

At David Sklar & Associates, we help people through situations like this every day. If co-signing has left you struggling, there are solutions.

So, how can you protect yourself before agreeing to co-sign?

Start by looking carefully at the borrower’s financial situation. Are they paying their bills on time? Are they relying on credit to cover daily expenses? Have they missed payments or dipped into savings to stay afloat? Those are warning signs that co-signing could go wrong.

If you decide to go ahead, stay involved. Ask for proof of payments or get online access to the account so you can monitor it. That way, you’ll know immediately if payments start falling behind.

You can also ask the lender about a co-signer release clause. Some lenders allow co-signers to be removed after a certain number of on-time payments. And if the loan involves collateral, such as a vehicle or property, consider being listed as a co-owner. That gives you some protection if the borrower defaults.

Always keep a copy of the loan agreement for your records, and make sure you understand every clause before signing.

Can you ever get out of a co-signed loan once it’s in place? Sometimes. If the loan has a release clause, you may be able to remove your name after a good payment history. Or the borrower might refinance the loan in their own name. But in most cases, once you’ve co-signed, you’re tied to that loan until it’s paid off or restructured.

So what’s the bottom line?

When you co-sign a loan, the lender treats you the same as the borrower. If they stop paying, you become responsible. They can take legal action, seize assets, or damage your credit.

That’s why it’s important not to feel pressured into co-signing, even for someone you care about. It’s okay to say no. There are other ways to help, like supporting them in rebuilding their credit or connecting them with a Licensed Insolvency Trustee for professional advice.

And if you’ve already co-signed and you’re now struggling to keep up with the payments — or the borrower has filed for bankruptcy — don’t wait. Talk to a professional.

At David Sklar & Associates, our Licensed Insolvency Trustees can review your full situation and help you find the best path forward, whether that’s a consumer proposal, bankruptcy, or another solution. The first consultation is completely free, and we’ll guide you every step of the way.

I’m Richard Sklar, and thank you for listening to Debt Free Life.
If you’re facing debt stress from a co-signed loan, visit www.davidsklar.com
to book your free consultation today.
That’s www.davidsklar.com
— helping Canadians find relief from debt and start living a debt-free life.