Highlights from the Dave Ramsey Show

QUESTION: Esperanza in Cincinnati co-signed for a private student loan when she was young, and it's now a month away from default. She isn't able to pay for it and isn't sure what her options are. Dave suggests working closely with her sister to get this debt resolved.

ANSWER: They'll work with you on payments after it defaults—believe me. They're not going to go away that easily. The thing you just need to understand is since your sister's not paying it, you will. They're going to treat you just like it was your loan. That is what a co-sign is. You are a co-maker on the loan. Both of you borrowed the money. That's what the law says about that. I think it's just going to be real important that you start to work with your sister very closely on what her plan is to pay this bill because morally, it's her bill. Legally, it's both of yours, and they'll come after you because you're going to be the one with the master's in counseling that's working. I hope you don't end up having to pay this whole thing because she bails completely, but you may have to.

Once it goes into default, what I would do is get your job and just start piling up some cash, and when you get $5,000 or $10,000 saved, I would call the people and say, "I want to settle with you for my portion of the loan. I know I owe the whole loan. I understand that now. When I signed this, I was 19 years old. I had no idea what I was signing, but I understand that still makes me liable. You need to understand that I had no idea what I was getting into here. You're welcome to chase my sister for the rest of it. Here's her address and phone number, but I want to settle my portion. Would you take $5,000 to take my name off of this?" If they agree to, then give them the money after you have that in writing from them. That's probably going to take you six, eight, nine months to get to that point from now, and you may have to talk to some nasty human beings in the meantime.

Folks, this is why we tell you never co-sign. I didn't say sometimes. I said never, under any circumstances, ever co-sign. "Well, I want to help my child get a car." So give them some money. "I don't have the money." That's my point. Don't co-sign for a loan. You know why? Because you don't have any money. The reason that the bank wants a co-signer is they know the person borrowing the money is not going to pay the bill.

Co-signing is one of the dumbest financial things you can do, and I've done it. I used to violate every one of these things that we teach. I have a Ph.D. in D.U.M.B. I know what stupid looks like because I used to look at him in the mirror. You have to decide what's working in your life. Never—there is no reason ever to co-sign.

Considering I never borrow money, it would be really super dumb for me to help somebody else borrow money. That'd be like two dumb things combined—double dumb. Proverbs 17:18 says it. It says it in the Bible. Go figure. The Contemporary English Version says it this way: "One who co-signs for another is stupid." That's exactly how it reads. That's what the Bible says. If you want to go to the New King James, it's a little gentler. It says, "One signing surety for another is lacking in sense." Either way, I think you just got called stupid.

I'm stupid. I've done it. I know what stupid looks like, so I'm not picking on Esperanza. She was 19 years old. She was stupid, and it's a stupid thing to do. A lot of us have done stupid things. This little discussion right here is for some of you that are just about to put your finger on the pen and just about to press it on the paper and about to engage in stupid called co-signing. Don't do it. Don't co-sign for your kids to get student loans. Don't co-sign for your kids to get car loans. Don't co-sign for your mom to get a house. Don't co-sign, because you're going to end up paying it, and it's stupid. Don't co-sign ever.

Some of you think you're the exception. Your little baby's a twerp and is not going to pay the bill. That's why they need a co-signer. Don't co-sign. Never co-sign. Have I been unclear here? I really don't want to leave this open to interpretation where anybody thinks that I stand on this. One hundred percent of the time you co-sign, it's stupid. There are no exceptions. You're not the exception. Don't do it. It's stupid. Co-signing is stupid.

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Question: Celeste in Minnesota and her husband are close with her brother. He called them to ask about co-signing on a home loan. How do they lovingly and respectfully tell him no? Not doing the deal is an act of great love, as Dave explains.

Dave Ramsey's advice: I've found in those situations that a real good diplomatic way of doing things is just tell the truth. What is the truth? The truth is that co-signing is a dumb idea because if any little thing happens, it could put a strain on an otherwise great relationship. The answer is if I were talking to your brother, I might say, "As weird as it sounds, I'm not going to co-sign because I love you and because I treasure our relationship too much to put it in jeopardy. I know that our relationship is based on a whole lot more than you using me to get things."

If he's the type who gets mad over this kind of thing, then your relationship's not really good anyway. That's an illusion. Relationships that are based on taking from one another only are not real relationships. I'm guessing he probably won't. You just have to be kind about it. You could just say this is an awkward conversation because you don't want to hurt his feelings, but if you have to, you're willing to risk hurting his feelings now to keep from really hurting them later. You don't want to have this conversation. It's weird to talk to him about this, but he asked, so you answer. And talk about the awkwardness of the moment. There's awkwardness in the air. That's why he's asking you about it. It's okay to say it's weird and you don't really want to have this conversation, but you need to give him a solid answer, and it has nothing to do with him. If there was one person on the planet that you would co-sign for, it would be him, but there's not one person on the planet.

You would be stupid to co-sign for anyone. There are people I love more deeply than anything, and I'm not going to harm them. He obviously can't afford the mortgage. So you're going to help him harm himself by buying something he can't afford. That's not helping him. That's hurting him. You don't necessarily want to go there in the conversation if you don't have to, but that ought to give you lots of assurance that not co-signing is you really helping him. People don't like to hear no, so you'll see how that works out.

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Question: Wendy in Dallas has a daughter and son-in-law who recently moved to Texas. They had a condo in another state, and since it didn't sell, they're going into a short sale. The homeowners association won't allow them to rent it. They're considering finding another small home for them, and Wendy would help them finance it. Dave has an answer Wendy wasn't expecting.

Dave Ramsey's advice: This answer is going to sound a little weird to you, but it is still what I would do if I were in your shoes. If you want to help them, I wouldn't do it unless you just give them the house. That sounds weird. But if you're not willing to write a check, don't get involved because here's the problem. When you loan someone money, it changes your relationship with them. Thanksgiving dinner tastes different when you eat with your master. The borrower is slave to the lender, and you don't want to change your relationship to them—and they've just been through hard times and bad times. The last thing they need is a payment that if it gets screwed up, Mom's on them.

I would rather them rent and get their act together for a year and actually show that they know how to handle money now, and let's get through this short sale and see what happens there. I don't want them getting sued after the short sale or a foreclosure or something like that and you giving them a house that they could lose then. Let's get the short sale completely behind them. Let them rent. Let's get them on a budget. Let them save money. They can make it on that. They don't have to buy right now. It could be a good opportunity, but it's really not good timing in their lives. If they buy and put something in their names, it could end up with a problem with this short sale looming over them. I'm going to get the short sale behind me, and I'm going to prove that I can get my act together with money, which they didn't because they have no money.

They made a decision that put them in a pinch or had to or whatever. We're still there. I really want them to have a year of healing financially and get this short sale off, and then if I'm in your shoes, what I'm probably going to do is write them a check. You need to see your tax advisor to do that properly and do it under the unified estate tax credit because otherwise you're going to have gift tax if you give them more than $13,000—give an individual more than $13,000, which you obviously will be doing. But you can give this and have it count toward your estate and for that matter, you can count it—if you have other children—against their portion of the estate. That would be fair to the other children. That sound a little weird, but I wouldn't get a mortgage deal with them, I wouldn't sign with them, I wouldn't co-sign with them, and I wouldn't loan them money that they had to pay back. You're going to get them into a mess and a relationship mess with you. I would avoid that. Just make it real clean, and if you're not willing to write $125,000 check out of your $1 million, then don't do the deal at all.

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