Can a co-signer be removed from a promissory note?

Yes, but only with the lender's agreement. A co-signer stays bound by the note until the lender signs a release, accepts a new note without that person, or changes the deal in a way the law treats as a discharge. The borrower cannot remove a co-signer alone, and neither can the co-signer.

All states have adopted Article 3 of the Uniform Commercial Code in some form, and under it most co-signers are accommodation parties. Illinois, whose statute is used as the example here, describes an accommodation party at 810 ILCS 5/3-419 as one who signs "for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given" for it. That person must pay in whatever capacity they signed, so a co-signer who signs as a maker owes the whole note.

Three ways off the note

The first is a signed release. Section 3-604 lets the person entitled to enforce the note discharge a party "by agreeing not to sue or otherwise renouncing rights against the party by a signed record." The lender may also strike the co-signer's signature from the note itself. Either way, the lender is giving something up, and most lenders want a reason first, such as a long payment history, a lower balance, or new collateral.

The second is a refinance. The borrower signs a new note alone, the lender marks the old one paid, and the co-signer is free once the old note is discharged. This works when the borrower now qualifies on their own income. The third is a novation, a single agreement signed by all three people that replaces the old obligation with a new one naming only the borrower. It combines the release and the new terms in one document.

Consider an example. A father lends his daughter $24,000 at 6% over 60 months for a used truck, and her husband co-signs the installment note. The monthly payment is $463.99. After 24 on-time payments, the principal balance is $15,251.73. The couple separates, and the husband asks to come off the note.

Under option one, the father signs a release. The daughter keeps paying $463.99 for the remaining 36 months, and nothing else changes. Under option two, the daughter signs a new note for $15,251.73 at 6%. Over 36 months the payment stays at $463.99, and stretched to 48 months it drops to $358.19. Option three is the one to avoid. The father quietly agrees with his daughter to stretch the payments to 48 months and never tells the husband.

Section 3-605 explains why a lender should bring the co-signer into any change to the deal. If the lender agrees to extend the due date, the extension discharges an accommodation party "to the extent the indorser or accommodation party proves that the extension caused loss" on the right of recourse. For other material changes, the loss is presumed to equal the full right of recourse unless the lender proves otherwise. If the note is secured and the lender releases the truck title without substituting collateral of equal value, the co-signer is discharged to the extent of that impairment.

Two limits apply. Section 3-605(h) says an accommodation party is not discharged unless the lender knows of the accommodation or has notice of it under Section 3-419(c), though in a family loan the lender almost always knows. And Section 3-605(i) says there is no discharge if the co-signer consented or if the note waives defenses based on suretyship or impairment of collateral. Many printed notes include that waiver, and when one does, only a release will free the co-signer. Some states use a later revision of Section 3-605 with different wording, so check your own state's version.

Business lenders face one more rule at signing. The Federal Trade Commission (FTC) Credit Practices Rule, at 16 CFR 444.3, requires a lender to give a cosigner a separate notice before the cosigner becomes obligated. Part of it reads: "You may have to pay up to the full amount of the debt if the borrower does not pay." The rule defines a lender as a person who engages in the business of lending money to consumers, so a parent making a one-time family loan falls outside it.

A release should be short and specific. Here is sample language the lender and borrower can sign, with a copy to the co-signer:

"Release of Co-Signer. Effective [date], Lender releases [Co-Signer name] from all obligations under the Promissory Note dated [date] in the original principal amount of $[amount], and agrees not to sue or otherwise enforce the Note against [Co-Signer name]. Borrower remains fully liable for the unpaid principal balance of $[amount] and for all other terms of the Note, which continue unchanged. This release does not affect any collateral securing the Note."

Attach the signed release to the original note, and write "co-signer released, see attached" beside the co-signer's signature. Stating the balance and the unchanged terms keeps the release from reading like a modification, which protects the lender's claim against the borrower.

If the lender refuses, the co-signer still has options. Under Section 3-419(e), an accommodation party who pays the note is entitled to reimbursement from the borrower and may enforce the note against the borrower. In the example, the husband could pay off the $15,251.73 balance and then enforce the note against his former wife. The borrower, by contrast, has no right of recourse against the accommodation party. That route costs the co-signer cash up front, so it usually makes sense only when the borrower has assets or income to collect from.

Sources

• Illinois UCC 810 ILCS 5/3-605
• Illinois UCC 810 ILCS 5/3-604
• Illinois UCC 810 ILCS 5/3-419
• 16 CFR 444.3, unfair or deceptive cosigner practices
• 16 CFR 444.1, definitions