Jointly shared debt – Part I
by Tim St. Vincent
This is a big topic so let’s break it down into two parts.
It’s a good thing right? I mean if I can help out my child or friend by co-signing a loan, or being a guarantor, it’s a good thing because I am helping someone. They make their payments and everything is all good. There is nothing to worry about – or is there?
Joint debt can be a tricky thing. First let’s make sure we all understand what joint debt is. Joint debt can be when you and your spouse get a house and both of your names are on the mortgage, or you get a new car and both of your names are on the loan document. Sometimes this can help you get a lower interest rate. Joint debt means that you are both, equally, either together or apart, 100 per cent legally responsible for paying back the debt. This isn’t unusual and it is fairly common with spouses, but even this can have some negative consequences.
Then there is joint debt with children (maybe Johnny needs help getting the car he wants, or with his first mortgage) or the friend that you completely trust who wants you to co-sign or act as a guarantor for her on a loan so that she can afford to go back home for a nice visit.
It is very important to understand that when you co-sign on a loan, or become a guarantor (they essentially mean the same thing), that if the other person(s) do not make their payments, you must make the payments. You are 100 per cent responsible for that loan, just the same as the other person. This can have a lot of unintended consequences.
Let’s take a look at what can easily happen. Your son, “Johnny” needs some help. His credit card debt has gotten out of control and he wants to get a consolidation loan to pay off the credit cards, but the bank won’t give him the loan unless he gets a co-signer, so he asks mom and dad for help. As parents, you want to help your child and would feel very guilty if you said no. So you agree. Johnny gets his loan and pays off most of his credit cards, but not all of them. He wants to have some fun with “his” new money, so he goes out and buys a new TV. Now that his cards are paid off, and he has that new TV, well he needs a better sound system, so he uses his credit cards to pick up a few other things to go along. I mean why not, the cards are paid off now and just waiting to be used. He will just pay for it later. After all, that is what credit is for; buy now, pay later – or whenever.
A few months later Johnny loses his job and is a little embarrassed and doesn’t tell his parents. He stops paying his credit card bills, which have once again become very large, and his consolidation loan that mom and dad helped him get. Months go by and Johnny misses more and more payments. Six months later, his mom and dad go to the bank to renew their mortgage. The person at the bank said it wouldn’t be a problem; just a formality as she has known you for many years and knows that you take care of your bills. Then she looks up from her paperwork with a concerned look on her face. All of Johnny’s missed payments affect not only Johnny, but you as well because you co-signed the loan. You are 100 per cent just as responsible for those missed payments as Johnny. The co-signed debt is considered your debt as much as his. As far as the credit bureaus are concerned, they are payments that you missed too. Both yours and Johnny’s credit scores will have taken a hit and gone down. It may even be possible that due to Johnny’s additional debt, you no longer qualify for the mortgage because your joint debt with Johnny is included in your total debt when calculating how much debt you can handle! Oh, and of course you only found out about the missed payments now, while you are at the bank discussing a mortgage renewal.
Let’s put another spin on this. Let’s say Johnny is doing great and staying on top of his payments. Mom and dad decide it is time to do some estate planning and decide that they don’t want to bother with a Power of Attorney. So they put Johnny down as a joint holder on all of their accounts. That way, if anything happens to them, the accounts will transfer straight to Johnny. Or if they are in the hospital, he can access their accounts to pay bills. Sounds harmless, right? Wrong. Let’s say Johnny’s situation has changed and he now falls behind in his payments. The banks have the right to go into your joint accounts now shared with Johnny, and they take money out of your accounts to pay off Johnny’s joint consolidation loan debt. That could come as a big surprise to you when the next mortgage payment is due and there is no money in the account!
We will continue this discussion in the December 16th issue.
Tim St Vincent is a retired CFP and is a Certified Educator in Personal Finance with the Credit Counselling Society, a non-profit organization. If you wish to contact the society for further information, assistance or to attend a webinar, please call 1-888-527-8999 or visit www.nomoredebts.org or www.mymoneycoach.ca.