What is Joint Debt?
Joint debts are liabilities where the obligation for paying the debt falls on more than one party. A person can become joint on a debt when they share ownership of an asset – for example joint on a mortgage that is co-owned – when lenders can request a co-borrower be added to a loan to reduce the risk for the lender, or when they execute a guarantor.
You can become a joint debtor by:
- Personally guaranteeing a loan;
- Signing on as co-borrower/co-signer; and,
- Obtaining a supplementary credit card (in some cases – you need to read the credit card agreement to know for sure).
Misconceptions about Joint Debt
Joint debt is a frequently misunderstood concept. To clear things up, here are some common misconceptions about joint debt and why they are incorrect:
The Total Debt is Split Evenly Amongst the Co-Debtors
There is a common misconception that entering a joint debt means you will owe only your share or percentage of the debt. This isn’t the case. Each party in the joint loan is responsible for the full amount of the debt. In other words, a joint debt – where two people are liable – means both individuals are liable for 100% of the debt – the debt is not split 50/50. The lender can only collect 100% of the debt but they can pursue both people equally for the debt.
If The Joint Debtor Agrees to Take on the Debt You Are No Longer Liable
If all joint debtors agree amongst themselves to pay their percentage of the debt this does not prevent the bank from pursuing all joint debtors. Even if you can work out a personal agreement with your joint partners to pay a certain amount of the debt, but this will have no effect on the liability falling on you if your partners fail to pay.
This is also true in relation to matrimonial settlement agreements. You may spend funds with a lawyer to determine how the debt is split amongst the separating partners in the matrimonial settlement agreement but the bank has not made this agreement and they are not bound by it. They can and will pursue each joint debtor regardless. There can be an indemnification clause in these agreements where one spouse will take responsibility for the debt but that also doesn’t prevent the bank from going after the joint debtor. What this does is provide a legal remedy – you can sue your ex-spouse – to collect from them should you end up paying a debt they agreed to become responsible for.
What Happens to Joint Debt in a Bankruptcy or Proposal
When you file a bankruptcy or consumer proposal you must include all of your debts over $250. When you include joint debt in this process your creditor will receive a dividend from the bankruptcy or proposal and you will no longer have an obligation to pay this (assuming it is a dischargeable debt). Legally there is no change for the joint debtor as they wll continue to be responsible for 100% of the debt as they were before but practically they may now see collection activity from the lender now that the other party to the debt is now protected by the bankruptcy or proposal.
What Happens if Joint Debt is Unpaid?
The consequences of not paying a joint debt are the same as not paying any other debt. Your creditors may begin reporting negatively on your credit report and pursue you for collection. This will negatively affect your credit rating and ability to qualify for loans. You should check your credit report (In Canada, you can use free websites such as Credit Karma and Borrowell – these are owned by TransUnion and Equifax, respectively) periodically to ensure that joint debts are being maintained. If not, your credit rating may be affected.
How is Joint Debt Treated in a Consumer Proposal?
In a consumer proposal, all your unsecured debts up to the date of insolvency are included in your proposal, including joint debt. The creditor will receive a dividend which will reduce the amount the joint debtor is ultimately responsible for.
How is a Guarantee by a Guarantor Different than being a Co-Borrower?
We typically see guarantors when a business owner is guaranteeing debt relating to the business.
A co-borrower is jointly and severally liable for the debt whereas the guarantor’s responsibilities are laid out in the agreement of the guarantor. The guarantor may be liable for a limited amount of funds or the whole debt. The lender may be able to pursue the guarantor at any time or the guarantor may only be liable when there has been a default or failure to pay by the business. It is important to read these agreements prior to signing so you know the obligations you are agreeing to.
In Alberta, there is a special requirement when a guarantee is signed. The individual signing the guarantee – also know as the guarantor – must confirm in front of a lawyer that they understand that they are obligated to pay for the business debt. The lawyer will execute a guarantor’s acknowledgment certificate that confirms the same. Without this certificate, creditors cannot collect against guarantors in Alberta.
What You Should Consider Before Entering into a Joint Debt
When you sign on as a joint debtor for a debt you must be prepared to pay the debt. Entering into joint loans are a great way for family and friends to work together to meet their goals, but it’s important to consider the various risks and weight them against the benefits before committing to them.
Here are some questions to ask yourself before doing so:
- Try to always put yourself in the worst-case scenario: You are responsible for this debt and if the other party fails to pay will you be capable of making the payments?
- Do the other parties have the capability and resources to continue making their payments?
- Does the other party have insurance that would help them make the payments should an accident or injury leave the other party unable to work?
- Does the risk of having a joint debt outweigh the benefit of building credit?
- What assurance do you have that is a joint signer is struggling to pay that they’ll notify you?
If you wish to better understand your obligations in relation to joint debts or business debts that you have personally guaranteed reach out to our office for a chat today at 587-269-3009 or firstname.lastname@example.org.