Joint Debt Problems
How to Deal With and Avoid Joint Debts

By Debra Pangestu

How Do Joint Debts Happen?

Joint debts can happen innocently enough, often with the best of intentions. Perhaps your son or daughter is applying for a student loan to fund their education and because they don’t have an adequate credit history, they ask you to co-sign their loan. Or, perhaps you and your spouse sign up for a joint credit card to help build up their credit history.

However, when you co-sign for a loan or sign up for any sort of joint agreement – such as credit cards and lines of credit – you effectively enter a legal agreement with your creditors in which any debt incurred is the joint responsibility of both parties.

What Can Happen If Joint Debts Go Unpaid

Signing up for joint credit – whether it be a credit card or a line of credit – can be tricky because sometimes one party will find themselves in a financial lurch: parents can be on the hook for their child’s student loan payment; ex spouses try to figure out who owes how much on their joint credit card; or friends are left out of pocket by someone they thought they could trust.

Since joint debts become the responsibility of both account holders, creditors have the legal right to demand repayment from either person if the debt isn’t being paid as agreed. So if your former spouse, your family member or your friend stops making payments on a loan or a credit card you co-signed for, you will be held responsible for making payments until the debt is completely paid off. If the debt goes unpaid for a period of time — or if the person you co-signed for defaults on their payments and a period of time passes before the creditor contacts you for payment — your credit rating will be affected.

Even if you have other accounts in good standing, having a joint account in arrears – or worse still, a joint debt in bankruptcy –  could hamper your finances in the future. In addition to the extra payments you’ll be expected to shoulder, as a joint debtor your credit rating will be impacted negatively, which could affect your chances of getting approval for a loan in the future.

So before you agree to be someone’s co-signer or joint credit card holder, think carefully about your financial responsibilities and whether you, as well as the person you’re co-signing for, can keep up with the payments. If they stop making payments, it’ll be your credit rating – and your money – on the line.

Dealing with Joint Debt in Divorce

Credit card companies aren’t bound by a divorce certificate, so if your ex spouse doesn’t make payments on the purchases they racked up on the joint credit card, the creditors can seek you out for payment. When you and your partner separate or file for divorce, it’s important to cancel or freeze your joint cards and accounts in order to protect yourself from any debt that may continue to pile up after the divorce.

From there, you have the option of handling your joint debt in divorce by paying your debts together or separately. You can use joint savings or tap into a home equity line of credit in a jointly owned home to pay off any joint debts. Or, you can liquidate any joint assets – such as a car or a home – and put the proceeds towards your debt.

If you and your spouse want to pay your joint debts separately, there are a couple of ways to handle debt payments. If you have debt on a joint credit card, you can ask your creditor to divide the debt on the card and transfer the amount to separate cards in each partner’s name. The catch here is that each of you will need to qualify for the debt on your own.

You can also write a letter to your creditor or lending institution stating that you will pay a certain amount, with the remainder paid by your spouse. To ensure that your credit rating remains intact, you can have your spouse transfer the balance of the debt to a credit card in his name, effectively making him responsible for paying off the remainder of the debt.

If only one person incurred the debt on the joint account and is willing to take responsibility, you can ask your creditor or lending institution if one person can qualify for the debt on their own merit. 

The person responsible for the debt can then apply for a new loan under their own name to pay off the joint debt. But do keep in mind that the person applying for the new loan will need to have sufficient income and good credit in order to qualify for the loan.

Once you’ve paid off your portion of the debt, it’s important to open your own chequing and savings accounts so you can establish your own credit. It’s equally important to keep an eye on the debts and loans that still have your name attached to them; don’t assume those debts are being paid off, even if your former spouse promised to take care of it.

Remember, your lenders made an agreement with you and your spouse jointly, and that agreement isn’t going to be affected by anything in your divorce agreement. If it stipulates in your divorce agreement that your spouse is responsible for paying the debt but no payments have been made, creditors can – and will – demand payment from you. Although it’s tempting not to make any payments towards debts you didn’t incur, it’s important to keep in mind that your credit is going to  be adversely affected.

Dealing with Joint Debt After Death

When you’re grieving the death of a spouse, shouldering the debt payments of your deceased spouse is probably the furthest thing from your mind. However for many, this is a reality that often leaves us blindsided. We may have co-signed for a loan or a credit card for our child or spouse that we long forgot about, and with their passing comes the news that there are outstanding debts that need to be paid.

Many people are under the impression that when a person passes away, their debt is forgiven. In most cases, you will not be held responsible for paying your deceased spouse’s debts, so long as those debts are only held under the deceased person’s name. But when it comes to joint debt after death, the surviving co-signer or joint account holder becomes responsible for the outstanding debt.

So, the first thing you should do is to check whether there is any insurance to pay off the debt. If you don’t have any insurance, or if the insurance won’t cover the debt, your next step would be to contact the creditor or lender to check the terms of the loan. If you won’t be able to meet your payment obligations, explain your situation and see if you can negotiate a more affordable payment arrangement.

Also, make sure that any regular debt repayments aren’t coming out from a bank account under the deceased person’s sole name, because those accounts will be frozen. You can ask the creditor or lender to transfer all future bills under your name, to make repayment easier.

If you’re falling behind on your payments because you’re surviving on only one income now, you don’t have to go through it alone. There are many accredited, non-profit credit counselling organizations that can provide you with other options and help you navigate through the debt management process, all at no cost.

Approach Joint Debt with Caution

The best way to protect yourself from joint debts is through preventative measures. If you can, start building up your credit history and savings on your own, so when the time comes for you to apply for a loan, you won’t need a co-signer. If you’re trying to build up credit but don’t qualify for a credit card, instead of getting a joint credit card you can ask a parent, friend or spouse to put money on a secured credit card as a loan to you.

If you’re being asked to co-sign for a loan or credit card, it’s best to exercise caution before agreeing to anything. With a loan, determine if it’s something you can realistically pay off without putting the rest of your finances in jeopardy, because if the person you’re co-signing for isn’t able to repay the loan, it will be your responsibility to do so. Here’s a handy debt calculator that can help you determine how much will be too much.

With a joint credit card, you can request a low limit to avoid the temptation of overspending and piling on debt. You can also set some spending boundaries on the card, such as usage (eg. Only gas and grocery purchases) and spending amounts (eg. Nothing more than $100 per week).  Whatever terms and responsibilities you agree on, it’s important that you put it down in writing.

If you’re thinking about asking your parents to co-sign on a student loan, make sure you’ve exhausted all your funding options – scholarships, grants, bursaries – before approaching a lending institution. If student loans are your only option, don’t get tempted to borrow more than you need; just because the money is available, doesn’t mean you need it.

Once you’ve taken these precautions, it’s also important to keep the lines of communication open and to monitor the joint account, to ensure neither account holder is spending too much and that payments are getting made.

What To Do if You’re Struggling to Repay a Joint Debt

If you’re really struggling to pay off a joint debt, speak with one of our credit counsellors. They’d be happy to go over your financial situation with you and lay out all your options so you can find the best way to deal with the debt.

One option that may be available is to do a debt consolidation through a debt management program, which consolidates your unsecured joint debts into one affordable monthly payment, often at a significantly reduced interest rate. Then each month, you and the other co-signer will be responsible for making one payment to the Credit Counselling Society, and the society in turn will disburse the payment to your creditors

Other repayment options may be available to you as well. That’s why the best thing to do if your struggling is to speak with one of our non-profit credit counsellors. Appointments are always free, completely confidential, and non-judgmental.