Out of curiosity, I’m wondering if there is any legal penalty for someone who willfully bails out on a loan immediately as soon as he/she can, within minutes, and leaves his/her cosigner to pay it - not as a matter of death or inability to pay, but willful refusal to pay.
Suppose Jack gets his friend Ryan to cosign on a loan, and then Jack literally waits for the ink to dry on Ryan’s signature on the contract and then says, “OK, that’s it, I skip out on this $50,000 debt pronto,” is that a form of legal fraud?
(No, this isn’t a personal situation; just hypothesizing…)
I think to default on a loan, you have to not make payments on it. I’ve never heard of a loan where the first payment is due within minutes of signing the note. A statement that you’re never going to make any payments has as much legal standing as Michael Scott declaring bankruptcy.
And the bank doesn’t care why or when Jack stopped making payments. They’re just going to go after Ryan to make the payments. They fully expected Jack to default anyway, that’s why they required a cosigner in the first place.
I believe you are incorrect about this, at least technically. Taking on debt that you do not intend to pay back is fraud, and a declaration immediately afterward that that was the case is important legal evidence, if someone were to actually try to prosecute the fraud.
In contrast, declaring bankruptcy does require a specific filing of legal paperwork. Simply saying it does nothing.
You’d probably have to do this a lot or really piss off a prosecutor for anything to come of this, though.
I wonder: would the cosigner would have a civil case against the other person (again, not that it matters much, since he’s probably judgment-proof)?
That’s definitely true. The whole reason that the bank wanted a cosigner was so they didn’t have to deal with chasing an expected deadbeat.
I believe Ryan could sue Jack if he refuses to pay. But even if a judge rules in Ryan’s favor, he’s still got to figure out how to get the money from Jack, who clearly doesn’t give a crap about financial obligations.
Meanwhile, Ryan is still on the hook for the full payments every month.
Cosigning on a loan seems to be a hugely risky thing to do with zero personal benefit.
Well, I think there could be. Let’s say it’s a car loan. Jack buys the car, Ryan co-signs. Jack has the car. If Ryan has to make the payments, I think he would have a good argument when he goes after Jack for reimbursement, even absent a signed legal agreement of any kind. (Collecting might be hard).
Assuming the car has not been destroyed or stolen or some other way lost it’s value, it would seem that Jack has at least one significant asset that could be pursued, doesn’t he?
There is no universal definition of loan default; the parties to the loan agreement decide what constitutes default for their loan. If they agree that repudiating the debt is a condition of default, the borrower declaring he won’t repay the debt puts him in default even if the borrower was never late on a payment. The borrower’s default can trigger certain lender rights under the contract immediately so the borrower’s statement could be legally significant. However, I won’t pretend that this is a standard term of every loan agreement.
Also, the bank cares very much whether the borrower repays. Collecting from the co-signer is plan B. The bank doesn’t want to rely on plan B because it makes it more likely that it will later have to resort to plans C through Z, some of which might really suck.
This part is right. It’s also “bad faith.” Courts won’t look kindly upon the person who enters a loan in bad faith.
It seems to me that there are two aspects to the question:
First, it seems like the entity making the loan could go after Jack or Ryan, notwithstanding either one’s preference to no longer be part of the agreement. I don’t think we’re in sovereign citizen land where people can sign contracts, and then simply declare that they will no longer be bound by the terms without facing some sort of penalty (like maybe repossession of any property, etc).
Second, it seems to me that there ought to have been some sort of agreement between Jack and Ryan, having nothing to do with the party making the loan. For example, Jack may have convinced Ryan to cosign the loan by saying that Ryan would only have to pay if Jack lost his job. So if Jack just stops making payments, the bank is certainly entitled to go seek payments from Ryan; but perhaps there’s a claim relating to promissory estoppel that Ryan can say that Jack unfairly stuck him with the whole payment contrary to what Ryan understood the terms of his cosigning to be.
If Jack is dumb enough to admit that he never intended to pay the loan back on tape or in writing, then Ryan probably has an easy time suing him for some kind of fraud. Jack also might get prosecuted for some sort of criminal fraud, depending on the exact law and circumstance. But most likely Jack isn’t that stupid, and instead will just quietly stop paying, and keep coming up with excuses, then dodge Ryan for a long time. In that case, Ryan might be able to sue Jack, but it’s going to be hard to prove, and Jack may have a good sob story that makes it look like Ryan is just being a heartless bastard to his now-broke friend. And there’s basically no way to make criminal charges stick without something clear from Jack. Ryan is pretty much going to be stuck paying the bank, though he might get paid back from Jack eventually. If they signed an agreement, then Jack backs out of it, Ryan may have better recourse for forcing Jack to pay, but it depends on what the agreement was. It’s unlikely to have any effect on Ryan owing the bank money, though, as the bank wouldn’t have signed the contract. (If they had an oral contract, Jack can just deny it in court. He doesn’t even have to directly say that Ryan is lying, just claim that the talk wasn’t part of any agreement but a general discussion of possible scenarios).
If you co sign just figure you are going to be the one paying. I learned it the hard way. If the bank figures the person is not good for it why do you think you have some magic inside info that makes this a good deal for you? what do you get in return for co signing. As the other posters pointed out a outright refusal to pay may be grounds for legal action but usually these things get a payment or two down the road and then they go south.
But Ryan’s claim doesn’t fall apart if it wasn’t in writing. He would surely just have to convince a judge or jury by the preponderance of the evidence that there was such an agreement.
But my point was that saying “Ha ha! I never intended to pay the loan back” doesn’t mean anything until Jack actually misses a payment. True, him having made that statement may come back to haunt him, but it’s not like the bank and/or Ryan can preemptively do anything because he made that statement. The statement doesn’t violate the terms of the loan. Missing a payment does.
That screws up Ryan’s credit. But, yes, it could be the best option. Depends on whether he has any hope of collecting from Jack, what his credit rating is now, and how much the loan is for.
Since the bank accepted Ryan as a co-signer, we can reasonably assume that his credit rating was at least fairly decent. The size of the loan was given in the OP as $50K.
Exactly. Ryan would sue, saying “I was doing a favour for a friend and he promised he’d make payments. He owes me.” Jack would have to answer to the judge… “No, the real story is…” Since Jack’s the one with the car, and there’s no obvious benefit for Ryan other that jack’s undying gratitude (for 2 minutes) he better have a really convincing story to tell the judge. The judge decides whose story makes more sense - “preponderance of evidence”.
Of course, if Jack said his bit in front of witnesses, he’s got even more of an uphill battle. If he immediately had pulled all his money out of the bank, and surreptitiously sold off his property for a quick getaway - that would be additional evidence not only of bad faith but also intent to commit fraud.