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When family debt is left unpaid, it can cause a major rift amongst family members, resulting in emotional and financial distress.
This is the second entry in a two-part blog series on family debt categories. Part 1 discussed becoming a loan guarantor in general, as well as becoming a guarantor for a spouse’s business loans. Here are three other primary categories of family debt:
Joint or Supplementary Credit Card
Most credit card providers allow you to apply for supplementary credit cards. This allows a primary card holder to provide supplementary cards to their family members, such as a spouse or children. What most people, however, do not realize is that liability for the payment of the credit cards is “joint and several.” This means that all card holders become liable to pay the full balance, regardless of who uses the credit cards. Quite often the secondary cardholder(s) are called upon to pay the liability of the primary card holder’s usage of the card. If someone offers you a secondary card, be sure you carefully consider the consequences before accepting it – particularly if your relationship with that person is tenuous or you’re concerned about the financial liabilities that may impact you.
In accordance with Canadian law, in a marital breakup each spouse has the right to an undivided half-interest in all family property and is equally responsible for family debt. Quite often the spouses will agree, in writing, to a breakup of the family assets and family liabilities. Sometimes they’ll also go to Family Court and get it approved by the Court through a Court Order. What most people do not realize is that the lenders associated with the liabilities are not bound by this agreement or the Court Order, since they are not party to either. This means the lenders will look to the payment of their claim from each or both spouses, notwithstanding the terms of the agreement.
It is very important to consider paying all joint family debts from the joint family assets before dividing up your remaining assets.
Direct Loans to a Family Member:
You may be asked to lend a family member some money. This is fine if a small amount is borrowed and is paid within a short period of time that you both agree to. If the borrower fails to pay it back, it can be easily forgiven by the lender (or at least, more easily than with a traditional creditor).
You may also consider lending money to help a loved one build wealth; for example, a down payment against a house. When it comes to this type of lending, there are two family debt scenarios to consider. First, the borrower may only need the money for a short period time, as his / her funds may be tied up in other properties or investments and cannot be easily accessed. In other words, your loan is to help them bridge a temporary gap.
Secondly, you may be looking at a long-term loan, one that will only be paid back when the borrower either finds themselves in a better financial situation or eventually sells the property, ideally at a profit. Regardless of what situation you’re looking at, both family members must know what they are getting into.
While it’s fine to tap into your family’s financial resources on occasion, borrowing money from family members for consumables and services that should be covered by your regular income may signal a larger financial problem.
For more information about family debt or to discuss your specific situation, contact a Government-Licensed Trustee at MNP Ltd. by calling 310-DEBT.
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*310-DEBT doesn’t operate in MB, NW ON and QC.
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