Pattie Lovett-Reid: Read this before you co-sign or co-borrow
There is a difference between co-signing and co-borrowing. Here is what you need to know.
Let's begin with co-signing.
We did have the "co-signing" conversation when the children went off to university. We felt they should have a credit card for emergency use, to establish a credit rating, and to use as they pleased, all in an effort to support their money management development. To be fair it worked, the limit was $500 and if for some reason they couldn't make their payments we would temporarily step in, help out and collect later. To be fair not one of the four of them ever needed our help.
Like many willing to co-sign a loan it really is considered to be a generous act. Wanting to help someone obtain a loan when they might not otherwise be able to so is very kind. However, it also means you take on all of the risk without any of the benefit. When you co-sign a loan it means should the applicant not pay, your obligation is to step in do so.
Co-signing is very straightforward and risky. As a co-signer it can compromise your credit rating, impact your ability to take on more debt, lead to potential legal claims against you, and could be a long term situation. However, you still might want to do it, if you can mange the risk, if you can afford it, and you are keen to help someone needing assistance move forward in their financial life.
It is understanding your potential obligations before you sign.
Co-borrowing is very different.
When you co-sign, you are guaranteeing someone else's debt; when you co-borrow, you are jointly taking out debt. This can be a good financial decision if the terms and conditions when you took out the loan remain the same). Where things can get messy is when a divorce or separation happens. Ron Shulman, founder and managing partner of Shulman & Partners told me, "most people do not think of debt as something they "own," and pay insufficient attention when signing debt documents, or guaranteeing debt for someone else.”
There is a great misconception that when you divorce, property is split 50/50. That isn't the case. A process of equalization happens and roughly this is where the assets owned by both parties are listed, the debt is subtracted, assets brought into the marriage are taken into account and the net result is the net family property of a spouse. In other words, whoever has more pays the other half the difference.
The bottom line: the equalization process does not change title in either debt or assets. It is simply a process to decide who owes who and how much. In others words, debts don't become joint when couples separate. If you have title to a car or a credit card in your name, the debt and liability will remain yours.
Shulman offered up these tips:
- Look at what you are signing even when you trust your spouse.
- So when co-signing or guaranteeing a debt make sure you think about an asset as a “right to control and sell the asset.” In other words you control the right to sell the asset too.
- Understand the documents you are signing. For example, if you have significant credit card balances on separation, and believe your spouse is jointly liable for the debt because they have a secondary card, it is not often the case. A secondary card doesn't create a co-borrower situation.
My takeaway: pay attention to the ownership of debt. If you are separating, equalization does not divide debt, only assets. If both spouses have more debt than assets you are solely responsible for the debt registered in your name.