manoeuvring through an unexpected financial burden can be daunting, especially when it happens to be someone else’s debt.
JustMoney,a platform that helps South Africans make good money choices, said that it is crucial that people understand when they can be held liable for debt incurred by their partner or another person.
According to Sarah Nicholson, operations manager of JustMoney, co-signing a loan for a spouse, friend, or family member can be a generous gesture, but it comes with significant risk.
“You’re essentially guaranteeing the loan and agreeing to repay it if the primary borrower defaults.
“No one taking out a loan intends to slip into a precarious financial situation, but an unexpected retrenchment or illness could lead to you dealing with the financial fallout, as a co-signatory,” Nicholson said.
Nicholson shares the instances when you are liable for someone else’s debt, including:
– If you’re married in community of property, or your ante-nuptial agreement specifies certain financial responsibilities
– If you hold a joint credit card or account
– If you add an authorised user to your credit card
– If you have co-signed a loan with someone
– If you stand surety for someone, or sign a formal debt-settlement agreement
Be clear on your commitments
Not having an understanding of the implications of your marriage contract, or lacking a contract, can lead to liability for your spouse’s debt.
Erin White, director at Crue Invest said that if you’re married in community of property, all your assets and liabilities are combined to form a single, joint estate.
“All debts incurred before and during your marriage will form part of the joint estate, and the actions of each spouse can affect the other. For example, if one is declared insolvent, both spouses will automatically be sequestrated,” White said.
According to White, if you marry out of community of property, your estates will remain separate, and any debt accumulated before or during the marriage will be the responsibility of the spouse who incurred the debt.
White said: “However, debts reduce the value of the assets to be shared if your marriage dissolves, so even though you would be protected from creditors, excessive debt would affect your share.”
If you marry without an ante-nuptial agreement, you will default to being married in community of property.
Manage the risk
If you’re approached to co-sign a loan or similar debt agreement, this is what you should consider.
– Financial stability: Assess the ability of the borrower to repay the debt. Do they have a steady income and a good track record of managing their money?
– Communication: You should discuss expectations and responsibilities with the borrower.
– Alternative options: Look at different ways to help the borrower, such as putting them in touch with a financial adviser, or helping them access alternative financing.
– Legal obligations: If you do go ahead as a co-signatory, ensure you understand the legal ramifications, and your liability if the borrower defaults on the loan or the debt agreement.
– Credit card boundaries: As the primary account holder, you’re ultimately liable, so be sure to monitor the spending of any other authorised user and set clear guidelines.
Take control of repayments
Despite the above precautions, if you find yourself dealing with someone else’s debt, there are steps you can take to manage it effectively.
– Assess the situation by determining the amount owed, to whom it is owed, and details such as payment terms, interest rates, and deadlines.
– Explain the situation to the creditors and see if they’re willing to work out a repayment plan or negotiate a settlement.
– If the debt is significant and you are struggling, consider consolidating or refinancing the debt. This can help reduce your monthly repayments and make them more manageable.
– Even if you’re not originally responsible for the debt, it could affect your credit score if it’s reported under your name. Track your credit report regularly and address inaccuracies.
Nicholson said that people should seek the advice of a financial adviser or debt counsellor, and remember to prioritise your own financial wellbeing.
“Take steps to protect yourself from similar situations in future, such as establishing clear boundaries with others regarding financial matters and practising good money-management habits,” Nicholson said.
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