Jointly shared debt – Part II
by Tim St. Vincent
As we showed in the last article (November 16, 2017), joint debt can be very tricky. Like any type of credit, it is neither good nor bad; it’s all in how you use it. But there are many things about joint debt that people don’t understand. Let’s continue from where we left off last month and look at another example.
You co-sign a loan for a friend or a family member. It doesn’t matter why or what they do with the money. Let’s say the loan is for $25,000 and two seconds after your friend spends the loaned money he or she has a heart attack and dies. You are now responsible to pay back the $25,000, not the person’s estate. The item that was purchased with the $25,000 may very well belong to the estate and not to you. So you are left with the $25,000 debt, but not the corresponding $25,000 asset that was purchased. That debt passes 100 per cent to you, but not necessarily the asset. Not something most people would expect. That also applies if the other person skips town, simply stops making payments, or applies for bankruptcy. One hundred per cent of the debt will pass to you.
Then there is the whole issue of divorce or separation.
We’ve all heard it before: a couple splits up, gets a separation agreement and then one person applies for a loan. The lender says, “Sorry, you don’t qualify because your credit bureau shows you have this other debt with someone else.” The client replies, “What? That’s not my debt! That belongs to my ex. We’re separated. We split up all the debts, and I have a legal separation agreement to prove it.”
A legal separation agreement doesn’t change the fact that both of you signed for the debt and even though you’re no longer in a relationship with each other, you are each still 100 per cent responsible for the whole amount of the debt. If the person who is supposed to make payments on the debt stops, then the other person will have to continue making the payments until the debt is paid off – even if the other person has possession of the asset, not you. Also, if one person stops paying or declares bankruptcy, the other person becomes responsible for making the payments or risks the creditors pursuing collection activities against them.
Even when you do things correctly – no payments are missed and everything goes along smoothly – joint debt can still work against you.
Let’s say you and your spouse have a joint line of credit. Often the person who earns more is the primary borrower and the other person is listed second. Some financial institutions only report information about a debt on the primary borrower and don’t mention the second signer. This second person is then overlooked when the reporting is done to the credit bureaus. If the couple should separate in the future, all of the payments that were made on time correctly will not benefit the other party. When a payment history on a debt isn’t reported, it simply doesn’t exist. If you are staying on top of your joint debt payments, it is to your benefit to ensure that your lender is reporting on both of you to the credit bureaus.
If you want to use joint debt as a way to build the credit score for both of the people involved, then the person with the lower income should consider just getting a small credit card with a $500 limit. Use it once a month for a small purchase like a chocolate bar and pay the bill on time. Even a monthly purchase as small as a chocolate bar can work to build your credit score.
Joint debt can be a great tool for family members to work together and help each other out – if it’s used properly and in the right circumstances. Make sure that you and your partner each have at least one debt – preferably a revolving form of credit like a credit card – reporting in your name. Before signing for any joint debt, consider what you would do if the responsibility for this debt fell completely on your shoulders. Would you be able to handle the extra payments?
You may also want to make sure that you and the other person have the right insurance just in case either of you passes away or gets hurt and is no longer able to maintain your current income. Your lender or insurance agent can provide you with more information so that you can make an informed decision.
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.