What is Joint Debt?
Joint debts are liabilities where the obligation for paying the debt falls on more than one party. Lenders will sometimes require joint loans to add an extra party for collection if there is an issue with repayment. A joint debt can be:
1. A guarantee for a loan – if the borrower doesn’t pay, you agree you will pay instead.
2. Co-borrower/co-signer for a loan – where both parties are equally liable.
3. Secondary cardholder of credit card – you could be liable however this is not true for all credit cards.
Is the joint debt split 50/50 between two debtors?
There is a common misconception that entering a joint debt means you will owe an equal percentage of the total debt – i.e., two joint debtors both owe 50% 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 is a 100/100 responsibility, not a 50/50 responsibility. The bank cannot collect 200% but they can collect from either or both joint debtors to resolve 100% of the liability.
Even if you can work out a personal agreement with the joint debtor to pay only a certain amount of the debt – for example, in a separation agreement after a relationship breakdown – this will have no effect on the bank’s ability to collect the debt from both parties.
Does the Bank have to collect from each joint debtor equally?
No. The bank has no obligation to collect equally from each joint debtor. It can happen that the joint debtor that has more assets or income – a greater ability to pay – will be pursued more vigorously than the debtor who has less to contribute. Joint debtors will each owe 100% of the debt, but the resulting collection will be disproportionality distributed between the debtors based on their ability to pay or the filing of a bankruptcy or consumer 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 your 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.
The one difference for a joint debt is that the bank can pursue collection from other people in addition to you.
How is Joint Debt Treated in a Consumer Proposal or Bankruptcy?
In a consumer proposal, all your unsecured debts up to the date of insolvency are included in your proposal, including joint debt. Once the proposal or bankruptcy is completed this debt may be discharged and you will be absolved legally from paying it moving forward.
For the joint debtor, however, nothing changes for them when you file a proposal – they will continue to owe 100% of the debt. They may start receiving collection calls from the creditor moving forward once the creditor can no longer collect from the person that filed a bankruptcy or consumer proposal.
A consumer proposal will provide a dividend to creditors which means a portion of the debt will be paid off throughout that process which will reduce the amount the joint debtor would be required to repay.
What Options Are There for Co-Signers If a Debtor Files a Consumer Proposal?
1. If a co-signer is not insolvent or does not wish to file a consumer proposal or bankruptcy, they can carry on paying off the remainder of the debt that they have co-signed.
2. If the co-signer is insolvent – cannot pay their debts as they become due – then they can seek the counsel of a Licensed Insolvency Trustee to explore their financial options.
What should you consider prior to co-signing for someone else’s debt?
A co-signor is someone who is signing up to be a joint debtor on a debt where the signor cannot qualify for the loan without an additional person taking responsibility for the obligations. Entering into joint loans as a co-signor can provide financing to help people successful apply for loans they might not otherwise quality for, but it’s important to consider the various risks and weigh them against the benefits before committing to them.
As soon as you are a joint debtor with someone — regardless of if they are your business, your spouse, your friend or a family member — you are now tied together financially. If something happens to them and they are unable to pay their debts, you (as the joint debtor) will be liable for any debts that are in both of your names.
Here are some things to consider:
• Sign as a joint debtor only if you are capable and willing of making the payment obligations on your own or have a way to satisfy the debt (ie. if you are a joint owner on a house, the house can be sold).
• You must be willing to have this debt included as one of your debts which may impact your ability to get financing in the future (it will impact your income to debt ratio that is used to determine if you can qualify for loans, mortgages, etc.).
• What safeguards – such as disability, supplemental or life insurance – have been put in place to ensure the payments can always be made?
• What is the purpose of the debt?
• Do you or the other party have any other debts and what is the history of repayment? If either of you have a bad credit rating or a high income to debt ratio, then adding more debt is likely going to make repayment of debt even harder.
• As a secondary cardholder, make sure to read the credit card agreement booklet to ensure you understand if you will be held liable for the credit card balance.
If you have joint debts and are unsure how these debts will impact you, please give us a call and we are happy to help you understand your obligations. If you are struggling with your debts and are worried about how a bankruptcy or proposal will impact a joint debtor, we can help you understand prior to considering a bankruptcy or proposal. We are here to help you move from financial distress to financial success – If you’re ready to talk, we’re here to listen! Contact us today!