Toxic Mom Leaves Daughter Drowning in Debt

When Mary was 17, her parents suggested that they apply for credit in her name to help her establish a credit history. They'd pay on the loans; she'd get credit for having credit and build up a credit score. Some 25 years later, what sounded like a good idea has turned into a nightmare, causing the 41-year-old woman to be denied loans and faced with the monumental job of paying off her parent's bad debts.

Mary, who asked that her real name not be used, serves as a cautionary tale for anyone who considers co-signing on a loan or allowing another person to use their data to get credit. You could be held responsible. And you have few ways to limit your liability.

"As a co-signor, you are agreeing to pay someone else's debt," said Nessa Feddis, an attorney with the American Bankers Association in Washington, D.C.. "You should not take that lightly."

Mary was too young to realize it when she agreed to the scheme, but she later learned that her parents had ruined their own credit, borrowing more than they could afford to repay. Getting credit with Mary's Social Security number allowed them to borrow enough to keep the game going, using her credit to make the minimum payments on their other debts. They kept the loans made in Mary's name current for a decade.

Mary thought everthing was fine until she asked her parents to pay off the loans so that she could buy a car. Mary explains that her parents' loans made her appear overextended because her earnings were not enough to pay on all of the debts appearing under her name.

Her request was innocent; her Mom's reaction was not. Instead of agreeing to pay off the debts, she stopped speaking to Mary and making even minimum payments on loans made in Mary's name. By the time Mary called for help, one account had gone to collection; another creditor had won a default judgement against Mary. Worse, Mary didn't even know about the bad debts because both the cards and the collection notices went to her parent's address.

"We see this a lot with parents co-signing so their kids can get loans," said Bruce McClary, spokesman for Clearpoint Financial. "What's unusual is when it's the parent who is defaulting on the child's loan."

While taking a moment to give silent thanks for not being born into Mary's family, contemplate the bigger issue. You may think it's fairly innocuous to co-sign for a $500 credit card for a college student, but if you do, you could end up in the same miserable boat as Mary. All communication between the credit card company and the borrower goes to the primary borrower, not the co-signor, banking experts say. If the borrower asks for more credit, the creditor could increase the borrowing limit, obligating you to far more than you originally bargained for, without ever telling you.

"As a co-signor, you are agreeing to pay off someone else's debts. You don't get bills. You don't get notified of changes in terms (such as boosted credit limits)," said the ABA's Feddis . "The borrower gets the account information. You are just obligated to pay the debt."

You don't necessarily have the right to unilaterally cancel the card, added Bill Hardekopf, founder of LowCards.com. You've entered into an agreement with three parties--borrower, co-signor and lender. Generally speaking, all three must agree to a change in terms.

If you're being pressured to co-sign anyway, take precautions.

• Evaluate your borrower. Is he or she responsible with money? If not, don't co-sign. If this is your child going to college, you can authorize them to use your card. That still gives them access to credit and still obligates you to pay for their charges. But it also gives you notice if the charges are getting out of hand, and the ability to unilaterally cancel the card.
• If the borrower is responsible, you may decide to co-sign to help the borrower establish credit. But discuss your expectations about how this card will be used and what happens if the card is not used as you expect.
• Work out an exit plan with the borrower and lender, determining how long you expect to be obligated and what needs to happen to get you off the hook. Because credit cards are revolving debt, this obligation does not automatically expire. Set an expiration date and get all parties to agree to it in writing. But understand that you may be forced to pay off the existing card balance on exit.
• Demand online access to the account. That should allow you to monitor the account, so you'll know if the credit limits have changed and whether the card is being used as you intended. Make sure to pay attention, checking the account at least once a month to ensure that payments are current and your credit (and trust) is not being abused.

One creditor, who had won a $4,700 default judgement against Mary, recently agreed to take $1,500 in payment. She's still negotiating with the others. (She is at least arguably on the hook for the debts because she signed for the first credit cards and agreed to allow her parents' access to her credit information.) These reduced payments will help her repay the debts and get a fresh start, but her credit is in ruins now and will be for some time.

She has the option of appending a statement to her credit file, explaining the reason for bad debts. That may help her recover from the credit damage her parents caused somewhat sooner. But it will be a long and difficult journey.