Things You Need to Consider Before Signing
The average debt per person in Canada is $73,532 as of 2020 according to Equifax. While debt can be a powerful financial tool to get you where you’re trying to go in life, it can also be the cause of a lot of grief if you are struggling to pay it off on time.
The stress of this can be exacerbated if some of your debts have a co-signer attached to them. You might be wondering what happens to your co-signers if you end up filing for bankruptcy. Or perhaps you find yourself on the other side of the equation and are wondering what will be expected of you if you’ve cosigned someone else’s loan.
Cosigning debt is a big responsibility that shouldn’t be taken lightly.
Let’s take a look at everything you need to know about what happens to debt-cosigners in the event of bankruptcy.
What Does it Mean to Co-Sign Debt?
If you choose to co-sign a debt of any kind, it means that you are promising to pay off the loan yourself. This means that if the primary borrower defaults on the loan, the legal obligation of repaying the debt falls on you. Creditors can use the same exact collection methods that they would use against the borrower in order to collect the debt.
If you co-sign for a car loan, it doesn’t mean that you have any right to the vehicle. It simply means that you’ve agreed to repay the loan amount. It’s therefore important that you are willing and able to do this if the borrower is unable to pay.
What Is Bankruptcy?
Bankruptcy is a legal process that is described in the Bankruptcy and Insolvency Act (“BIA”). It is appropriate if an individual is unable to resolve their financial difficulties by other means. Upon declaring bankruptcy, the Licensed Insolvency Trustee (“LIT”) will take possession of the bankrupt’s assets (except those exempt from seizure by law), sell them and distribute the funds to the creditors. Bankruptcy terminates, upon discharge, most, if not all, of an individual’s debts.
How Debt Co-Signers Are Affected By Bankruptcy in Canada
If you co-sign or are a joint applicant on a loan and the borrower files for bankruptcy, the creditor can pursue you in order to collect the remaining amount owed. Basically, you are responsible for 100% of the debt that remains unpaid as a result of the bankruptcy.
If you are going to declare bankruptcy in Canada and you have debts with co-signers or joint applicants, it’s a good idea to talk to them first.
What to Think About Before Agreeing to Co-Sign
Before you co-sign a loan, it’s important that you understand the risks involved. This is a uniquely vulnerable position, so it’s not a decision you want to make lightly.
However, let’s first discuss the benefits of being a co-signer. The upside of this type of agreement is that you can help someone you care about qualify for a financial product that they wouldn’t be able to get on their own or you can help them get a lower interest rate.
It can also be very helpful for people who are rebuilding their finances or new to credit in the pursuit of their goals.
That being said, there are a few risks to be aware of. The first is that you are responsible for the entire loan, as mentioned above. This is by far the biggest risk as you are signing on to take care of the debt if the borrower can’t.
This means that you will want to look at your own finances to make sure you can make the loan payments if they default. If they fail to pay the loan responsibly, it can also affect your credit. In addition, it could change your debt to income ratio in a way that impacts your ability to take out a loan.
Another risk is that it could damage the relationship you have with the borrower. If they initially start making on-time, full payments with good intentions but then run into some hard times, it can put a lot of strain on the relationship.
You’ll want to take all of this into consideration before deciding to co-sign on a loan.
Cosigners and Bankruptcy: Final Thoughts
It is important to understand your legal obligations when cosigning debt before agreeing to do so. If the person you are helping, defaults on the loan or declares an assignment in bankruptcy, you’ll be stuck footing the bill.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee and Consumer Proposal Administrator. Its professionals have assisted thousands of individuals successfully resolving their debt crises and overcoming financial turmoil since 2002. Its passion – its mission – is your health and well-being!