Nov. 12, 2010 -- "Son, can you co-sign for my car?" That's the kind of question more adult children like Daniel Lee have heard from parents hit hard by the great recession.
"[My father was] working in the diamond industry when the housing boom happened; he started investing in housing and, unfortunately, when the housing market went down, he started losing money," leaving his credit damaged, Lee, a Miami-based computer programmer, says.
Lee's retired father, 65, began having difficulty keeping up with his mortgage payments as the housing market soured, and late mortgage and auto payments began to tarnish his credit. His father's newly checkered credit made it difficult to maintain a car and that's when his son stepped in.
After the credit crunch, record unemployment levels and financial Armageddon, many parents have chucked the norm and sought credit help from their children, financial planners say.
Evidence of such an increasingly popular arrangement has popped up in a few places. Although the number of parents co-signing for adult children has risen to 11 percent from 9 percent in the past two years, the number adult children helping parents with a car lease has increased more than 30 percent, according LeaseTrader.com, an online car-leasing website.
The adult children, defined as people ages 20 to 29, have been assisting parents who are 40 to 55.
The business of co-signing is a tricky proposition for adult children, especially those struggling to pay back their college loans or looking to save for a house.
"I got so much from him, I don't think that the short-term, 15-month lease, and the total amount for the lease, is going to destroy my life," Lee, 29, says.
The nation's economic woes appear to be adding to the burden. Fifty-six percent of bankruptcy debtors last year were ages 35 to 54, according to the Institute for Financial Literacy (http://www.financiallit.org/resources/2009Demographics.htm#Age). While the number of debtors between the ages 18 and 44 shrank, the number of bankrupt debtors ages 45 and up climbed slightly from 2008.
Foreclosures, unemployment and the overall health of consumer credit may be "forcing adults to make this decision and take this alternative approach," says John Sternal, vice president of marketing communications at Miami-based LeaseTrader.com.
Measuring the Risk of Helping Parents
But the financial alternative comes with pitfalls when a co-signer becomes liable for the full loan if a parent fails to pay. "One of the problems of co-signing is you usually don't know there's a problem until the loan is in default," says Rick Kahler, a financial planner at Kahler Financial Group in Rapid City, S.D.
"If a payment is missed, you're one of the last to find out."
A collection agency will go after a co-signer as aggressively as the original debtor. And, unfortunately, unlike a bank, a co-signer cannot repossess an auto loan if parents fall behind on a financial obligation.
Also, "late payment can blow someone's credit score by 100 points," says Sergei Lemberg, an attorney at consumer law firm Lemberg & Associates LLC in Stamford, Conn. "A single missed payment can cost you thousands of dollars."
A parent's failure to make timely payments could also result in higher interest for credit cards and other lines of a credit, and could affect mortgage approval rates.
What's more, co-signing on a loan turns a familial relationship into a business one. "You have to be ready to pay off that loan," Kahler says.
"If you think it's a wise thing to do, then, of course, go for it but you still must say, 'I'm going to be just fine if I have to step in and make this good because that's the bottom line.' The bottom line is you've got to be ready to pay off that note."
For Lee, there was no hesitation. "When I needed him, he was there for me," Lee says, adding that he pays the majority of the $280 car lease.
The Good, the Bad and the Ugly
Of his decision to co-sign rather than buying his father the car, Lee says, "it's going to help him begin to rebuild his credit.
"I didn't want everything in my name. He's on the lease because I wanted his name on the registration, and I wanted him to be part of it because it's his car," Lee adds.
But not all families handle the arrangements so effortlessly.
"I need opinions please; I feel forced to co-sign on a mortgage for my parents ...," a Twitter user wrote a week ago, sharing in anonymity the qualms many children face when asked to co-sign.
From another user: "... More important things to worry on. Dad wants me to co-sign on a car."
And it's no cake walk for the parents, either.
"A parent having to swallow very hard and ask their adult child to co-sign for a car loan means the parent is in financial distress and not able to obtain the loan though their own credit worthiness," says Gail Cunningham, vice president of public relations for the National Foundation for Credit Counseling, a financial education and counseling service based in Silver Spring, Md.
The parent-child relationship generally "has the parent being in charge and child being obedient," says Theodore Connolly, author of personal finance book "Road Out of Debt."
Co-signing, he says, unwittingly creates a master-servant situation, and the person that owes the money falls into a different status. "A child lending to a parent is almost reversing the relationship and could cause problems," he adds.
A few experts were split about how to seal the deal, but most agree that parent and child should be prepared to pay if there are any hiccups during repayment of a loan.
That's why Lee and his father picked a Toyota RAV4 compact when deciding on a new vehicle.
"Of course, I'm not going to take a lease for a brand new Mercedes," Lee says. "I'm not going to take a lease that's going to destroy my life."
But any child who resists should consider offering alternatives to avoid souring the parental relationship, some experts say.
Declining to co-sign can be "explosive when you include the family dynamics of the situation because we're not logical with this decisions," South Dakota financial planner Kahler says.
Remember that you're in an adult role, not a child's. And instead of simply declining, explain the downside and ask if there are other ways to help.
Given that his own father almost went bankrupt after co-signing on an employee's business loan, Kahler suggested offering to give the item to the parent as a gift, or putting the loan in the child's name to give complete control of the assets.
While there may be no way to avoid upsetting your parents, there are valid reasons to decline, credit counselor Cunningham says.
"If your mom, dad or parents have demonstrated financial irresponsibility their whole life and you feel you're enabling them by co-signing, speak the truth in love," she says. "Or, if opening a new line of credit could impact your credit score."
Lee's solution was to minimize the impact.
"We looked at a short-term lease and not something like 36 months," he says, "so I made my risk much smaller."