A co-signed debt is where the third-party co-signer agrees to be directly liable for the debt of another called the first-party borrower, usually because the first-party borrower would not otherwise individually qualify for the loan. A co-signed debt, under the law, is considered like any other secured debt. For example, if the co-signer offered her real property as collateral, then the co-signer risks losing that collateral if the first-party borrower defaults on the loan.
Under such a secured loan, there is what the law calls “privity of contract” between the lender and the third-party co-signer under the legal theory that the lender agreed to be an intended third-party beneficiary to the contract. Even though there may not have been legal consideration between the first-party borrower and the third-party co-signer.« Back to Glossary Index