Whether you are considering co-signing a loan with your child, signing up for a joint credit card with your spouse or even signing on to help out a close friend – when it comes to co-signed debt consumers need to be aware of the commitments and responsibilities they’re taking on.
Take it from a Licensed Insolvency Trustee – shared credit can turn into a big cost: read on to understand the ins and outs of joint debt, and why you may want to think twice before taking on co-signed debt with another party. Knowing is not owing!
What Does it Mean to Co-Sign Debt?
There could be several different reasons why people might consider having co-signed debt together. Regardless of the situation you may be facing, all parties need to be clear about the following:
- By co-signing a debt together both parties are equally legally responsible for repaying 100% of the unpaid balance to the lender. This is called a “joint and several liability”.
- Notwithstanding any personal understandings or commitments between co-signers as to who will make the payments, know that if you are the co-signer and your co-borrower doesn’t make all the payments per the terms agreed to with the creditor, that bank/lender can demand that anyone listed in the loan or agreement (i.e. you the co-signer/co-borrower) repay the entire balance – not just half.
- Lending agreements sometimes contain an acceleration clause which allows the lender to demand full immediate payment of the entire debt if a borrower breaks any part of the agreement, such as missing payments.
Co-signing a debt means you are making it easier for a creditor to recover their money if something goes wrong, and for co-borrowers there can be serious consequences including some or all of the following:
- Creditors demanding you immediately repay the outstanding balance in full.
- Contact and threats from collection agents attempting to extract debt payments.
- Notations to your credit history about payment defaults or collection actions.
- Co-signed debt will often also be noted on your credit report to begin with, which can impact your overall borrowing capacity.
- Legal action such as asset seizures or even wage garnishment.
Many people are not able to take on someone else’s debt payments without major stress and potentially serious upset to their own personal finances. In addition to the possible financial impacts of struggling to maintain a new joint debt, financial burdens caused by missed payments on co-signed debts can strain the relationship you have with the other person.
What’s the Difference Between Co-Signing and Guaranteeing a Debt?
There are some key differences to be aware of when it comes to co-signing VS guaranteeing debts. While co-signed debts could involve virtually any type of credit, guarantees are most commonly undertaken with respect to mortgages, loans, or business debts.
For example, a lender may require an applicant/borrower to bring on the backing of a guarantor when the borrower alone doesn’t have enough income to meet the lender’s standard, or where they have sufficient income but don’t have a strong enough credit rating.
Note below the important distinction between how payment defaults of the original borrower are addressed in each of co-signed debts and guaranteed debts:
- For co-signed debts borrowers are jointly responsible and the lender can immediately demand payment from either party.
- Guaranteeing a loan or other debt means you are promising to pay the debt if the main borrower doesn’t, but the lender must first ask the borrower for payment before turning to you as the guarantor.
It’s essential to understand the type of guarantee you are undertaking before you sign any documents as not all guarantees will be the same. For example:
- All-Accounts or Continuing Guarantee: You are committing to pay any debts a borrower owes the lender should the borrower default. This may include debt you don’t specifically know about, such as future credit extended after you sign the guarantee.
- Specific or Limited Guarantee: You are responsible for the debt of a borrower should they default, up to the value of an amount specified at the time of the guarantee.
The bottom line in any type of financial commitment or legal contract is to ensure that all parties are fully aware of the specifics being undertaken. Don’t hesitate to connect with a debt help professional or lawyer to help you interpret contract terms and understand your rights and remedies.
Before You Co-Sign a Debt
As Licensed Insolvency Trustees we are sometimes asked when it might be appropriate to co-sign a debt with someone else – the answer is “almost never.” If you make the decision to co-sign a debt with another party, we advise you to proceed with extreme caution and remember to consider whether you can financially (and emotionally) afford to take on someone else’s debt in the event they aren’t able to continue to make all of their payments.
Co-borrowing with someone else is a big responsibility, whether you’re seeking credit primarily for yourself or for someone else, always be sure everyone is fully informed and that the expectations and rights of everyone concerned are clear before signing.
Understanding borrowing terms and who is legally responsible for what is very important – below we’ve outlined some common misunderstandings co-signers often face when it comes to “the fine print”:
Joint Credit Card Accounts
- Primary cardholders are responsible for paying for purchases made by additional cardholders.
- Do not assume that being a secondary card holder will necessarily negate your responsibility for credit card debts. Some credit card terms may state that secondary cardholders are responsible for outstanding balances, even if the original card application wasn’t signed by them.
- “Additional cardholder” “Co-borrower” “Co-applicant” and other terms can have different meanings, ask for clarification and don’t make any assumptions.
- If you have shared credit cards, clear communication and reviewing monthly statements with each party noted on the statement are musts. Keep track of the status of the account and balances, ensuring both borrowers are fully aware of payments due and made, as well as any changes to the terms and agreements.
- Be clear about how much the loan is for and whether the loan’s terms allow the borrower to increase the credit amount.
- If you have co-signed a loan with someone else, you should know that all borrowers have the right to receive information from the lender about the loan.
- Unless you consent in writing or verbally to waive this right, the lender must provide everyone associated with the account copies of the credit agreement and monthly statements.
- When the loan is paid off it’s a good idea to confirm with the lender that you’re no longer liable as a co-signer. You may also want to request official documentation such as a letter of acknowledgement or release to prove you are cleared of further liability.
- The same caution applies during the purchase or lease of a vehicle – many people simply do not realize the full commitment they are making on a co-signed vehicle financing or lease because their spouse or partner plans to be the primary insurer and driver of the vehicle.
In simple terms, the moment you co-sign a debt for someone else you have become responsible for paying it back. Although you can try to negotiate with the lender to remove your liability for a loan you have co-signed, for example, if another person is willing to replace you as the co-signer, or if most of the loan has already been repaid, but there are no guarantees this will be successful.
No matter what type of debt you’re considering co-signing, it’s important, above all, to consider whether you would be able to repay the entire debt if they other person didn’t – particularly if the entire balance was demanded immediately. We’ve seen a number of insolvency proceedings that were triggered simply by a co-signed obligation that the individual had never thought would impact them directly.
Relationships alone do not create a legal obligation for paying someone else’s debts. Spouses will only have a shared responsibility for each other’s debts by:
- Specifically co-signing/co-borrowing or guaranteeing debts together; or
- Separating/divorcing and having debts split under BC’s Family Law Act.
A creditor cannot simply turn to a related party for payment – but if you co-sign a debt with a spouse, child, parent, other family member (or virtually any other party), you are creating a personal commitment to that creditor where one would not otherwise exist.
Personal Financial Help
Many people who might generally avoid “financial attachment” with another person will decide to make exceptions in certain circumstances, such as when a close friend or family member is facing financial difficulties. Common examples of offering personal financial help might be gifting or lending personal funds or even co-signing on a consolidation loan. Although the intentions may be admirable and generous, when it comes to getting debt help from personal resources it’s important to note the following:
- Personal or family-driven funds are often a temporary fix for a larger problem and accepting money from friends or family can cause friction and emotional distress in the event they can’t be repaid as intended.
- Qualifying for a consolidation solution that requires borrowing can be difficult if you don’t have a strong credit score and/or major asset to pledge…or a co-signer, which as we’ve discussed is simply giving the creditor more pockets to reach into if the debt is not paid.
Family/friends can provide invaluable emotional support, especially when one is facing challenging times (financial or otherwise). Just as it is almost never advisable to co-sign debts with another person to begin with, it is almost certainly never a good idea to involve friends/family financially or legally if you need help with a debt problem.
When it comes to practical solutions and understanding your legal rights and remedies in difficulties with debt you need professional guidance to ensure you avoid potential minefields that can make the situation more difficult to resolve. Licensed Insolvency Trustees are the only debt professionals legally empowered and endorsed federally and provincially to assist individuals with debt management solutions. There is no cost to connect with a Licensed Insolvency Trustee to discuss your situation and assess all the options available to you to resolve your debts.
Consolidation Without Borrowing or Requiring a Co-Signer
Consolidating debt can be a good strategy to streamline payments and make debt payments more affordable. If you find yourself in a position where you are considering a consolidation solution to manage your debts, a better option may be consolidation without borrowing by filing a Consumer Proposal. As outlined below:
- Consumer Proposals can successfully consolidate all your debts (even government debts) without borrowing, interest charges or added fees.
- In addition to consolidating your debt a Consumer Proposal usually also cuts how much debt you need to repay down to an affordable amount, and monthly payments can be considerably lower than a consolidation loan or even a non-profit credit counselling program.
- Your credit score and history in no way impact your eligibility for consolidating debt with a Consumer Proposal and no co-signer or guarantor is needed.
If you or someone you know is having challenges managing debt or feeling debt-stressed, we encourage you to seek professional advice from a Licensed Insolvency Trustee and take some time to learn about and understand all your debt management options. When connecting with a Licensed Insolvency Trustee, you can rest assured that:
- Free, confidential consultations may be done online or over the phone.
- You are under no obligation to commit to any process or sign any official documents.
- Legal debt solutions including Consumer Proposals and personal bankruptcy may be filed and served to your creditors online.
Get your financial fresh start and relief from debt-stress with professional support from caring non-judgmental experts – book your free confidential debt consultation with Sands & Associates today.
This content is not intended to be specific legal advice; it is intended to be a simple guide in layman’s language to provide a basic overview only. E. Sands & Associates Inc accepts no responsibility for its use other than as intended. The law is an ever-changing body of statutes and decisions, and the reader is advised to seek legal counsel for specific matters relating to their situation.